Higher CFR won't pressure margins, says Westpac

Westpac New Zealand expects minimal pressure on its interest rate margins from the rise in the core funding ratio to 75 per cent expected by mid-2012. The caveat, however, is that there is no significant deterioration in the spread between sovereign debt and the benchmark funding rate, which is the bank bill rate.

The impact will be minimal because Westpac has said it is comfortably placed to meet the 75 per cent norm when it comes into effect. Westpac says it has been above the CFR for some time now. The bank's stable funding ratio, which is an equivalent but less stringent measure than the CFR as defined by the Reserve Bank's policy, was at 79 per cent at the end of March, up from 78 per cent a year earlier.

Banks' margins have come into sharper focus recently after the Reserve Bank's liquidity policy requiring banks to maintain a minimum CFR of 65 per cent came into effect. The scramble to raise more funds via retail deposits pushed up deposit rates, and is believed to have hurt banks' margins.

In a recent report, KPMG said, "The focus on securing retail deposits is not going to change in the short term and will continue to put pressure on the cost of funds and margins for all institutions."

The Reserve Bank, on the other hand, has said it will assess the impact of the CFR before moving to full implementation of the 75 per cent target in mid-2012.  It also suggested the development of the covered bond programs, so banks can have an alternate source of funding to retail deposits.

With banks already moving to tap funds via covered bonds, it is possible that the pressure on margins expected from increased CFR will be muted.

Separately, Westpac says it has seen a stabilisation of its total stressed assets position as the New Zealand economy has begun its recovery. While impairment provisions in the half-year period to March 2010 remained elevated when compared to the preceding half year, where two big provisions took up a large chunk, the bank's total impaired assets rose slightly to NZ$730 million in March 2010, compared with NZ$710 million in March last year.

The bank's 90-day plus past due assets, which is a good indicator of future impairments, stood at NZ$311 million in March, down from NZ$347 million a year earlier.