Pressure coming on bank margins

BNZ’s result was described as “solid” by out-going chief executive Andrew Thorburn but also warned pressure was coming as borrowers moved to fixed rate loans.

Friday, May 9th 2014, 9:23AM

BNZ, like the other banks, is coming under pressure as lenders switch from floating to fixed rate home loans.

Net interest margin decreased by six basis points to 2.34% compared with the same period last year, however increased by one basis point compared to the six months ended September 30, 2013.

“This was largely driven by customers’ preference for lower margin fixed rate lending in a rising interest rate environment.”

As this trend to fixed rate loans continues banks will come under more pressure.

However, chief financial officer Adrienne Duarte said some of the interest rate margin pressure is being offset by falling funding costs.

She says some of the expensive funding which from the start of the global financial crisis is starting to come off and be replaced by cheaper funds.

BNZ saw average lending volumes increased by $3.1 billion or 5.2% to $62.5 billion compared to the March 2013 half year.

The increase was driven by a strong business lending portfolio experiencing steady growth in institutional banking and agribusiness.

In the housing market it had lost market share from 16.2% a year ago to 15.8% as at March 31.

Thorburn says BNZ is “focused on quality over quantity with our mortgage book.”

He said the bank was developing products and services “that help customers develop a sustainable financial position.”

“We are seeing a notable increase in mortgage pay downs due to products like TotalMoney and HomeAdvantage.”

Thorburn admits that BNZ’s strategy around products puts pressure on its interest margins. One of the challenges with HomeAdvantage is to get people with existing credit cards to move their home loan business to the bank.

The bank reported a 3.4% rise in half-year cash earnings for its banking operations to $400 million yesterday. The results were primarily driven by business lending growth, tight cost control and lower loan losses.
Provisions for bad debts dropped $15 million to $41 million.

Key NZ Home Loan Numbers

	March 14	Sept 13	March 13	Sept 12
Lo-Doc Loans	0.21%	0.23%	0.27%	0.26%
Variable rate	38.3%	46.6%	52.7%	57.7%
Fixed rate	57.9%	49.4%	43.1%	38.0%
Line of credit (LOC)	3.8%	4.0%	4.2%	4.3%
Average loan size	$281,000	$272,000	$265,000	258,000
Interest only (excl LOC)	23%	23%	22.4%	21.7%
Third party introducer	0.0%	0.0%	0.0%	0.0%