ASB has written home loans at zero margin at times over the past 18 months, according to the bank’s CEO Vittoria Shortt.
Speaking to interest.co.nz on Wednesday after ASB posted an 11% drop in interim profit to $749 million from last year’s record high $840 million, Shortt said it had been an unusual time.
This saw ASB’s total advances to customers contract, dropping $805 million to $107.642 billion at December 31 last year from $108.447 billion at June 30 last year.
Asked to what extent the lending contraction was driven by weak credit demand, ASB’s commercial strategy or competitive dynamics, Shortt said it was very mixed.
“It depends on what sector you’re talking about. In the rural sector we were on par with the [overall] sector, and really pleased with the resilience we’re seeing with our customers there. We haven’t seen a lot of demand from them. Where we have seen demand we’ve been meeting it,” said Shortt.
“Our business sector includes corporate, major property businesses all the way down to the smallest of businesses. Where our growth has been weaker has been in the small end and that is more aligned really to home lending. On the home lending front the competition has just been absolutely intense and we’ve got to be really careful in those periods that we stay consistent with our credit settings and we have been more selective there.”
ASB had “not materially” altered credit settings over recent months, she added.
At $75.103 billion, down $549 million over the six months to December, home loans comprise 70% of ASB’s total lending. It’s New Zealand’s second biggest home lender after ANZ.
Last August Matt Comyn, CEO of ASB’s parent Commonwealth Bank of Australia (CBA), complained pricing conduct in the NZ home loan market was “difficult to reconcile” offering “unsustainable returns.” And CBA’s Chief Financial Officer Alan Docherty said ASB’s margin on new home loans was less than half what CBA was getting in Australia, “and significantly below the cost of capital.”
Asked about these comments Shortt said it had been “a really challenging” period.
“We saw periods where the margin got to zero on home loans. So that is well below the cost of capital. That has been a very challenging dynamic,” Shortt said, adding this was “over the last 18 month period, broadly.”
Asked how this had affected ASB’s term deposit rate pricing, she noted there was a mix between pricing deposits and offshore funding, with a lot of different factors at play.
“One of the things we’ve been conscious of is making sure we’ve passed on benefits of the interest rate cycle to deposit customers. They’ve had a long time where the interest rates have been so low. For a lot of retirees or pre-retirees they’re really dependent on interest income. Deposit marketshare growth has been around 3% [over the half-year]- that’s an example of where our pricing reflected growth,” said Shortt.
Of home loans, where she says system-wide growth was 3% over the 12 months to December versus ASB’s 0.2% growth, Shortt said ASB always wants to grow on average over the long-term.
“If I have a look at our market share over the last five years it has moved about a lot. And there are a lot of things that go into that. The competitive response is a big one.”
“You’d have to say that when it’s a low growth environment it obviously gets more competitive. You’ve got a lot of market participants who want the same thing. So everyone’s trying to do better,” said Shortt.
In its interim results ASB reported a 26 basis points fall in its net interest margin, the difference between what the bank borrows money at through the likes of deposits and what it lends it out at, to 2.21% from 2.47%. Despite the fall, that’s still a healthy margin.
Asked whether deposits or mortgages contributed more to the margin drop Shortt said a competitive home loan market, higher funding costs and customers switching to lower margin savings products such as term deposits from lower interest savings accounts all contributed.
“All three are really important there.”
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