Short-term fix for NZ bank profits

An analysis of profit results for the December 2009 quarter published by banks in New Zealand highlights the dilemmas in bank managements.

Banks want, and are being pushed, to raise more funding from retail deposits, but the impact on margins is severe at current pricing. So a few banks have taken the alternative route of repairing profits by lifting their reliance on short-term funding sources.

This was true at ANZ National, the largest bank in New Zealand, where improved earnings were reported even after allowing for a decline in the loan book: the lift to profit followed a cut in impairment provisions and the reliance on short-term debt such as commercial paper increased.

On the other hand, Westpac reported the worst pre-tax profit after the bank's impairment provisions rose as the loan book increased, but an increased reliance on short-term debt could not bring down its interest expense significantly.

ANZ's focus on managing its interest expense by shifting its funding sources to short-term avenues isn't surprising after chief executive officer Mike Smith warned in November that banks in NZ are pricing themselves out of business due to stiff competition in the deposit rate market.

"If there is some common sense applied, hopefully we'll see an increase in margin activities, but the deposit rates have just been ridiculous in terms of competitiveness, and I think that's something we just need to watch," Smith said.

ANZ's pre-tax profit rose to NZ$303 million in the December quarter, from a loss of NZ$33 million in the September quarter and was also higher than NZ$296 million in the same quarter of 2008.  Provision for credit impairments fell 58 per cent to NZ$145 million compared with September, though it rose 54 per cent from the December 2008 quarter.

On the other hand, Westpac's pre-tax profit fell 29 per cent to NZ$60 million from September and was down 63 per cent from the December 2008 quarter. Impairment provision rose 91 per cent to NZ$125 million from September, and 37 per cent over the December 2008 quarter.

Westpac, however, says the rise in impairment is a reflection of the consistent approach maintained by the bank.

"The disciplined risk processes led to us recognising larger impairments in the March and June quarter and a reduction in the September quarter," said Richard Jamieson, Westpac's chief financial officer.

Moreover, the bank claims it has improved its methods of recognising impairments in the consumer portfolio, and "when adjusting for this our underlying quarter-on-quarter impairments are showing improvements."

A key feature of the periodic disclosure for ANZ, Bank of New Zealand and Westpac activity in the December 2009 quarter has been the increase in commercial paper issuance.  

Westpac has led in this with a 40 per cent jump in commercial paper issuances to take the outstanding amount to NZ$8.48 billion in December; ANZ follows with a 22 per cent jump to NZ$9.02 billion; while BNZ's commercial paper issues rose 16 per cent to NZ$7.14 billion.

Westpac also increased its euro denominated debt issues by 18 per cent to NZ$5.76 billion. The bank's total debt issues thus rose sharply to NZ$15.77 billion from NZ$12.36 billion while deposits fell to NZ$31.76 billion from NZ$32.49 billion.

Westpac's Jamieson said the increase in commercial paper issues is a result of strong asset growth during the period. "All CP is issued under the bank's two current offshore debt programmes - US Commercial Paper and Euro Commercial Paper."

However, a closer look at the bank's assets showed net loans grew just 1.2 per cent to NZ$48.79 billion compared with September and total assets rose only slightly to NZ$55.35 billion, up 1.5 per cent.

At Kiwibank, which is a much smaller bank with an essentially retail focus, lending increased seven per cent to NZ$9.7 billon, up 6.5 per cent.  

Kiwibank too seems to have funded most of the loan growth through wholesale deposits, which rose 39 per cent to NZ$2.84 billion.

Retail deposits, which also include deposits with PIE Unit Trust, fell 0.6 per cent to NZ$6.89 billion. It may be noted wholesale deposits at Kiwibank have risen nearly three-fold compared with NZ$1.04 billion in December 2008.

The trend at BNZ was similar to ANZ National with pre-tax profit rising strongly even as the loan book shrank, but impairments fell and increased reliance on instruments like commercial paper kept a tight lid on interest expense.

BNZ's pre-tax profit rose to NZ$182 million from just NZ$4 million in the September quarter and impairment provision fell 10 per cent to NZ$43 million. The bank's net loans fell one per cent to NZ$54.57 million but commercial paper issues rose 16 per cent to NZ$7.14 billion. Interestingly, BNZ also raised more funds via certificates of deposit, which rose 11 per cent from December compared with a fall of 28 per cent over December 2008.