Banking on those stellar results

By Richard Braddell

Between the lines

We can sniff: ASB Bank's latest annual profit is a mere 8.3 per cent higher than the previous year. But that's a result that looks disappointing only in the context of some exceptional performances over the past five years.

The result should be no surprise since the first half of the year got off to a subdued start, with profit rising only 6.3 per cent for a $56 million contribution to the year's $117 million net bottom line.

The slow first half owed much to the sharp fall in interest rates during that period which left the bank with a portfolio of expensive term deposits to support while the rates it was lending at were falling. As those positions unwind, ASB's meagre 2.36 per cent net interest margin at year-end, a low for the last five years, can be expected to improve.

Other banks faced the same problem. But while retail focused banks such as ASB and TSB took the margin hit on the chin, the more wholesale oriented banks gained solace from the capital gains they made in wholesale markets due to falling interest rates.

Indeed, the country's biggest four banks have been going from strength to strength, producing returns on assets close to or better than 1.2 per cent.

It was only a year ago that the director of Massey University's banking studies department, David Tripe, worried that banks were mostly failing to reach what he regards as an appropriate return on assets of 1 per cent.

The two laggards now are ASB and Taranaki's TSB who can hope their returns of little better than 0.8 per cent will improve as the wind-down of term deposits continues.

The question remains whether the stellar performance of the rest of the banking sector is sustainable.

The Reserve Bank's implementation of the official cash rate in March has eliminated much of that volatility capitalised on by wholesale money market traders.

To compensate, banks will continue to look for other ways to make money, among them selling financial services such as insurance and funds management.

But whether returns of 1.2 per cent of assets can go on is another matter. The banks' recent high income levels have helped push down their expenses as a proportion of income to what Mr Tripe regards as an historically very low 53 per cent.

"Previous research has shown that low cost-to-income ratios should be regarded as evidence of excessive profits, implying an opportunity for new banks to enter the market," he says.

Or there could be a customer backlash unless some of the cost savings are passed on to them in lower fees.

Banks need look no further than across the Tasman where consumer anger about banks has become a significant political issue.