ASB says it will take a co-ordinated effort to tackle climate change events like Cyclone Gabrielle. Photo / Hawke's Bay Civil Defence
New Zealand needs to take a coordinated approach in how it addresses climate change and climate transition rather than individual companies trying to tackle it, ASB chief executive Vittoria Shortt says.
Speaking after its half-year result was released, Shortt said the recent weather events had shown the bank how imperfect the modelling was for flood risk in New Zealand.
“When we did our climate report we said that flooding was the highest risk for home lending and when we did our modelling we quantified what that might be, we understood the areas that were prone. Off the back of that work, we also did a pilot where we called customers to make sure they were conscious of these factors and that they were insured.”
But she said the ASB had since learned a couple of things. “Firstly, the data is imperfect. This recent event shows us that. There were areas that were flooded that were not expected to flood.”
Shortt said at a national level, that meant New Zealand needed to think about the data it was holding and try and improve and understand it with greater accuracy.
Asked if the recent flooding events would lead to the ASB declining to lend on certain properties, Shortt said: “That’s not the way that we want to work. I want to work with the whole industry, the insurance industry, with the Government, to understand how to tackle climate and climate transition. If everybody goes off and does their own thing, I don’t think that’s a good outcome for New Zealand.”
Shortt said house insurance was a contractual requirement for home loans with the bank and insurers told the bank when its customers let their policies lapse, which enabled the bank to remind customers.
“We have been proactively contacting our customers when this is the case to remind them.”
Most customers were happy to be reminded but for some who had not renewed, it was down to financial difficulties.
“That’s a different conversation, which is if you are in financial difficulty, let’s talk about that.”
Shortt said at this stage, only a low number of customers had applied for mortgage relief or KiwiSaver hardship withdrawals due to the impacts of the floods and Cyclone Gabrielle.
“Initially people are more concerned about, are they safe, what has happened, how do they clean up?”
She said the bank had put support packages in place to take the initial pressure off. “For now we feel like that is working really well.”
“But over time naturally, we will start to understand more about what the impacts have been.”
The ASB’s first-half results show it had a strong end to last year with the bank reporting a record net profit after tax of $840 million - a 10 per cent rise on the same prior period in 2021.
At the same time its net interest margin increased 33 basis points to 252 basis points. The margin is the difference between what it earns on loans versus what it has to pay out on deposits.
Shortt said in the last 12 months the bank had increased lending for both its personal and business customers by $4.5 billion while deposits were up by $5.3b.
“That’s obviously a really big underlying driver of profitability - the increase in volume that we see.”
She said the margin rise was due to the sharp rise in the official cash rate (OCR).
“When the OCR declines we see a contraction in deposit margins, and when it increases we see an increase in deposit margins, and that is definitely factored in.
“What we have also seen is the converse for home loans - home loan margins have been really impacted in this period. What we are looking at is, if you think about what we have just been through, we have seen a huge decline to record low interest rates followed by the fastest lift in OCR [official cash rate] that we have ever seen - 3.5 per cent in the last 12 months - this is a really difficult period to manage margins in when we are seeing so much shift.”
She said the bank had passed on OCR benefits faster on term deposits than on its lending side.
The bank was taking a proactive approach to supporting borrowers.
“We’ve already reached out to more than 4,000 of our home loan customers to help them understand the options open to them, and by the end of the year, we expect to have contacted a further 9,000 customers who could face financial challenges.”
Shortt said it would be another year until all of its home loan customers were on substantially higher rates. “We have a lot of customers rolling through in this period. At the moment about half of our customers are on rates higher than 5 per cent - which we use as a bit of a bellwether.”
Shortt said it didn’t have many borrowers who were heading onto rates higher than the rate they were tested at when they applied for the loan.
“We don’t have many in that ballpark. The reason for that is we have had very high test rates. The highest in the market as far as we can understand. We have also been really careful around debt-to-income levels for home lending.”
The Reserve Bank has been given permission by the Government to use debt-to-income limits as part of its toolkit but has yet to finalise what that might look like or when it might apply.
“We have always had that in our lending considerations. We have been quite particular all the way through this last couple of years about where we have lent and why. We are not seeing any significant signs of stress. But we do want to be prepared.”
The bank’s financials show its 90-day-plus home loan arrears have ticked up slightly in the last year, from 0.19 per cent to 0.22 per cent.
Shortt said it was concerned about it rising further.
“The forward-looking environment is uncertain. The last couple of years have taught us that. We think that next year is going to be challenging with further rate increases. At the moment the markets are saying and our economists are forecasting the OCR will rise by another 1 per cent”.
She said the really big question was what happened to unemployment.
“When the labour market is [as] tight as it is, on the one hand it provides real challenges for businesses but on the flipside, it’s great for households. That’s really the big one to watch in my mind. If you are still employed then making payments is much easier. That’s the one we want to keep an eye on.”
At the moment its economics team was not seeing any big warning signs on that front, she said.
Shortt said it was expecting the home loan market to be much slower than it has been in the past. She said the bank’s economics team was thinking the market would decline about 25 per cent from peak to trough, but that was following a rise of 30 per cent.
“For most people they don’t buy a house to sell, they buy their home to live in for a long time. Most people, that shift in prices won’t affect them.”
On the business lending front, it had seen a lot of growth in large corporate lending and less growth in areas like small business.
“The only thing to note is we haven’t seen growth in our rural book because a lot of our rural customers have been paying down debt. In some instances it is good news because we have got business customers who are really shoring up their balance sheet and really making sure they are resilient for what [they] might go into.”
Shortt said small businesses had been through a lot. “They are still trying to recover from Covid. They have got a lot of inflationary pressures feeding through. In some instances we hear from our business customers they can’t get the people - they could grow but they can’t get the people to grow.”
She said the weather events over recent days and weeks was going to exacerbate a lot of those factors.
Shortt said the big issues on people’s minds were the rise in expenses and interest rates.
“For us it’s a continuation of what we are focusing on. We have seen some pretty traumatic events at the start of this year and so it really highlights what we have been trying to focus on for a long time now, which is how can we help people be more resilient - because these things are happening whether it is a pandemic, a big lift in inflationary pressures, whether it’s a weather event.
“What we are seeing is that we really need to build more resilience into our personal balance sheet - save more for rainy days and really think about that from either a business perspective or personal.”
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