ASB lifts annual profit 8% but says underlying growth was subdued

“It’s pleasing that we have a more positive economic environment here in New Zealand,” says Vittoria Shortt, noting that Australia’s GDP growth is 1.8 percent while New Zealand’s is 2.7 percent.

Commonwealth Bank of Australia’s results were also impacted by remediation costs in the wake of Australia’s royal commission into financial services, the removal of fees and the cost of risk and compliance measures.

ASB reported a $1.27 billion net profit for the 12 months ended June, including a $46 million profit from selling Paymark, compared with $1.18 billion the previous year while CBA’s net profit fell to A$8.57 billion from A$9.33 billion.

Shortt acknowledges the uncertain environment with business confidence significantly depressed and increasing global risks.

“We see more downside risks for the next period.” But, on the other hand, the jobless data released on Tuesday showed the unemployment rate fell to an 11-year low in the June quarter at 3.9 percent.

“We’re in somewhat uncharted territory because not everything is moving” in a way that would be historically expected, she says.

Shortt wouldn’t be drawn on the likely impact of falling interest rates on ASB or on whether that will make it harder for the bank to turn a profit.

“We never comment about or give guidance of what our rates will be” but changes in the OCR will impact differently on different products, so "it's not as straightforward as I think you're looking for," Shortt says.

Within hours of the ASB result, the Reserve Bank cut its official cash rate by 50 basis points to a record low of 1 percent, surprising the market which had expected a 25 point cut following a 25 point cut in May.

Less than quarter of an hour after the RBNZ announcement, ASB said it was cutting its two-year fixed mortgage rate by 4 basis points to 3.75 percent from Aug. 8 while shaving 50 points to 5.2 percent off its floating home-loan rate, effective from Aug. 14 for new customers and from Aug. 21 for existing customers.

ASB also said it is cutting the interest rate it pays on its most popular retail savings account, Savings on Call, but didn't say what the new rate would be. Its website shows rates for that account from May 15 after the previous OCR cut ranging from 0.1 percent for amounts up to $24,999 to 0.25 percent for amounts above $100,000.

But the latest results showed ASB’s net interest margin started to decline in the latest year, down 3 basis points to 2.21 percent. Margins had improved in the 2018 financial year for the first time since 2015.

Shortt says the bank’s underlying result was “more subdued this year, reflecting a backdrop of slowing credit growth in the business and consumer finance sectors.”

ASB’s investment to prevent financial crimes and increase cyber security contributed to the bank’s 4 percent increase to $967 million in operating expenses, Shortt says.

“Our long-term financial performance is driven partly by our continued focus on investing in and driving efficiency,” she says.

“Our cost efficiency advantage positions us strongly and allows us to be more resilient and remain profitable in the event of an economic downturn. “

Much of the cost increase was the result of hiring 181 more staff, primarily IT, risk and compliance staff, bringing total full-time equivalent staff numbers to 5,038.

“I would say we will see further increases in people who undertake that kind of work. It’s probably more around the changing skills that we’re seeing in banking right now rather than further significant increases,” Shortt says.

ASB increased its tier 1 common equity by $500 million to $6.4 billion, or 11.4 percent of risk-weighted assets, during the year.

The Reserve Bank is proposing to lift the minimum tier 1 common equity ratio from 8.5 percent current to 16 percent for the four major banks including ASB after a phase-in period of several years. RBNZ is scheduled to announce its final decisions on bank capital in November.

Shortt attributes the decline in net interest margin mostly to higher funding costs and also to mortgage customers’ preference for fixed-rate loans.

She says that was partly offset by lower costs relating to customers breaking fixed-rate loans.

ASB’s disclosure statement shows its mortgage book grew by $1.86 billion to $57.6 billion between December last year and June this year and by $3.3 billion, or 6.1 percent, over the full year, up from the $3.02 billion growth the previous year. Its customer deposits grew by $3.09 billion, or 5.5 percent in the latest year.

The bank’s charges against profit for bad and doubtful debts jumped 35 percent to $108 million in the latest year which Shortt says was due to a change in accounting standards.

“Overall, credit quality remains sound,” she says.

CBA shares fell 1.2 percent to A$78.835 today, and have risen more than 8 percent in the past year compared with the S&P/ASX 200 Index’s 3 percent gain.