Banks’ lending growth continues but results stand still
Banks’ lending growth continues but results stand still
The profits of New Zealand’s five major banks have flattened during the second quarter of the 2015 calendar year (being 1 April 2015 to 30 June 2015, 2Q2015) with net interest margins levelling off, continuation of lending growth and lower loan loss provisions.
Net profit before tax for the second quarter of 2015 has flattened compared to the first quarter of 2015 at $1.69 billion, decreasing by a negligible $2 million compared to the first quarter of 2015. However while net profit before tax has remained flat in the second quarter of 2015, there have been some interesting movements that have contributed to this levelling off.
Compared to the first quarter of 2015, net interest income has increased by $45 million (2.2%) and impairment losses on loans have decreased by $27 million (27%). However, other operating income has decreased by $88 million (11.2%) and operating expenses have also decreased by $14 million (1.3%), principally due to a one-off reclassification between these items. When normalising the impact of this reclassification, other operating income has decreased by a negligible $1 million (0.1%) while operating expenses have increased by a noticeable $73 million (6.7%).
While net interest income has increased, this appears to be primarily driven by an increase in gross lending of $7.4 billion (2.3%) during 2Q2015 to $334.7 billion, rather than an increase in lending margins. Interest income has increased by $74 million across the same period to $5.4 billion for the quarter.
The highly competitive lending environment in New Zealand has continued into the second quarter of 2015, with banks offering interest rates on mortgages below 5.0%, continued pressure on lending margins, and preferences by customers for lower margin fixed rate mortgages.
Interest expense has increased by $29 million since 1Q2015 to $3.3 billion for the quarter, with funding growth during 2Q2015 of $16.3 billion to $359.6 billion.
Overall, the banks’ net interest margin for 2Q2015 has remained in line with 1Q2015 at 2.26%. This flattening in net interest margin is due to a combination of a contraction in lending margins, which have been offset by the banks experiencing more favourable funding conditions during the second quarter of 2015.
On a normalised basis, other operating income is relatively flat for the quarter, with some volatility in the gains/losses on financial instruments recognised at fair value for each individual bank and, on a normalised basis, operating expenses have increased compared to 1Q2015 by $73 million, reflecting the incurrence of higher costs during the period.
Interestingly, impaired asset expenses or bad debt expenses have decreased by $27 million to $73 million in 2Q2015 compared to $100 million in 1Q2015. This decrease is surprising given where we are at in the economic cycle, which may be aided by the depreciating New Zealand dollar experienced during the quarter providing relief to exporters. Three of the banks reported lower impaired asset expenses over the second quarter compared to 1Q2015, so does this mean the banks are taking their medicine quickly?
Total lending growth for the second quarter of 2015 was 2.27%, up from the previous quarter of 1.90%, and this growth is higher than in any quarter during the 2014 calendar year. Total lending increased to $334.7 billion at the end of the second quarter, compared to $327.3 billion for the first quarter of 2015. The major driver of the increase is the continued growth in corporate lending which has increased by 3.02% in 2Q2015 (2.18% in 1Q2015). Total corporate lending increased to $123.7 billion at the end of 2Q2015, compared to $120.1 billion three months earlier.
Mortgage lending growth for the quarter was 1.85%, up from the previous period’s mortgage lending growth (of 1.72%). This is now the fifth consecutive quarter where the growth in mortgage lending was lower than corporate lending growth in percentage terms. Total mortgage lending stood at $197.3 billion at the end of 2Q2015 ($193.7 billion at 1Q2015). The major banks’ are within a whisker of having mortgage lending in excess of $200 billion. Other retail lending remained largely static at about $13.7 billion.
The percentage of mortgages with an LVR in excess of 80% has continued to fall and is now at 13.8% of total mortgage lending in 2Q2015, compared to 14.4% of total mortgage lending in 1Q2015. The Reserve Bank has recently announced some tweaks to the current LVR restrictions as a consequence of the heated Auckland property market which are due to come into effect from 1 November 2015. These are as follows:
•Rental property investors in Auckland will generally require a 30% deposit for a mortgage secured against Auckland rental property, with a ‘speed limit’ of 5%; and
•An easing of LVR restrictions outside of Auckland where the banks can make up to 15% (currently 10%) of their new mortgage lending with LVR exceeding 80%, regardless of whether it is for property investors or owner occupiers.
Mortgage holders on floating interest rates make up 25.3% of the mortgage market at 2Q2015 and slightly down from 1Q2015 of 26.9%, as fixed rates especially in the short to medium-term, are generally more favourable than floating interest rates. OCR cuts during the second quarter of 0.25% by the Reserve Bank have influenced short to medium-term interest rates, some currently below 5.0%. This has had an impact with customers on fixed rates of up to 2 years increasing from 57.9% in 1Q2015 to 61.0% at end of 2Q2015.
A further 0.25% OCR cut was announced by the Reserve Bank in July 2015 and economic forecasts are speculating further cuts to the OCR in the second half of the 2015 calendar year. This could see further demand in short to medium-term fixed interest rates, as customers seek certainty with low mortgage interest rates and possibly fuelling further growth in lending. Customer preference for fixed rate mortgage with terms above 2 years has decreased from 15.0% in 1Q2015 to 13.6% in 2Q2015 as long-term interest rates are influenced by the wholesale funding market.
Total credit provisioning has decreased by $60 million since 1Q2015 to $1.9 billion at 2Q2015. When breaking this down, this decrease is driven by a fall in individually assessed provisions which has declined by $90 million or 14.3% since 1Q2015 to $540 million at 2Q2015. This has been partially offset by an increase in collectively assessed provisions of $30 million or 2.3% to $1.3 billion in 2Q2015 when compared to 1Q2015.
The decrease in individually assessed provisions in 2Q2015 is consistent with the decrease in impaired assets having decreased by $128 million or 7.9% to $1.5 billion at 2Q2015 compared to 1Q2015. This decrease would be due to the work out of impaired assets during the second quarter of 2015, or write-off/release of individual provisions for impaired loans raised previously for certain large single named exposures for corporate loans.
Overall, the story on credit quality appears to be improving when comparing 2Q2015 to 1Q2015, with decreases in total credit provisions and bad debt expenses. 90 day past due assets (not impaired) have decreased by $54 million or 7.9% to $628 million at 2Q2015. However while this is all good news, risks remain with concerns raised over the heated Auckland property market and the rural sector. During August 2015, Standard & Poor’s dropped the credit ratings for each of the New Zealand stand-alone Australian-owned banks, reflecting concerns over any potential correction in property prices.
Total funding has grown by $16.3 billion during 2Q2015 compared to growth in gross loans of only $7.4 billion during the same quarter. The extra funding has been largely deployed into other interest earning assets.
The funding mix for 2Q2015 has started to change from the previous quarter reflecting the increase in gross lending which is out-performing the growth in retail deposits. Retail deposits grew by $2.8 billion or 1.2% since 1Q2015 to $241 billion, far below the rise in gross lending during the same period of $7.4 billion. To fund this growth in gross lending, non-retail deposit growth has increased by $13.5 billion or 12.8% to $118.6 billion during the same 3 months. Retail funding as a percentage of the banks total liabilities has decreased from 63.5% in 1Q2015 to 60.6% in 2Q2015.
The banks continue to be well above regulatory minimums for capital levels, with average total capital ratio hovering at 12.5% at 2Q2015, consistent with 1Q2015. The Reserve Bank will implement the new asset class treatment for residential property investors to come into effect from 1 November 2015. The banks would be expected to potentially hold additional capital for residential property investment loans or reduce their current capital adequacy headroom, and depending on the strategy of each bank, this may have an impact on pricing for property investors.
Basic leverage ratio (eligible capital to total assets) decreased from 7.14% at 1Q2015 to 6.94% at 2Q2015 which reflects the increase in credit growth by the banks during the second quarter of 2015 outpacing the increase in eligible capital.