Banks' profits explode as bad debts reduce

It's been a bumper year for the banks, with combined profits up more than 10pc to $4.1 billion. Photo / Richard Robinson

Expert says sector’s ballooning rate of profit growth can’t be sustained for another year.

Westpac NZ's record annual cash profit of $864 million has confirmed a bumper year for this country's big four Australian-owned banks, with their combined profits surging more than 10 per cent to $4.1 billion.

That's close to $1000 for every man, woman and child in New Zealand.

But Massey University banking expert David Tripe says the local banking sector is unlikely to keep up its ballooning rate of profit growth, which has been largely driven by a sharp reduction in bad loans on the back of an improving economy.

ANZ, ASB and BNZ have also reported record profits for their last financial year.

"That [drop in bad debt] has had a positive impact on their observed income, but it also means that it's a source of improvement in profits that they can't rely on continuing," Tripe said. "One certainly wouldn't expect any of the banks to achieve the same profit growth next year that they've achieved this year and depending on how the numbers work out they may even have lower profit."

Yesterday, Westpac NZ reported a 78 per cent reduction in loan impairments to $26 million in the 12 months to September 30 from $117 million during the same period of 2013.

Tripe said a more normal level of annual impairment charges for a bank the size of Westpac NZ would be around $80 million.

Bank of New Zealand last week reported a 12.1 per cent reduction in annual provisions for bad and doubtful debts to $12 million.

The Big Four

Combined NZ cash profit for ANZ, BNZ, Westpac and ASB:
$4.1b

• ANZ - $1.68b

• Westpac - $864m

• BNZ - $807m

• ASB - $776m

Acting Westpac NZ chief executive David McLean said the impairments charges the bank was currently experiencing were extremely low and unlikely to reduce any further.

"Things have got about as good as they're going to get," McLean said. "This is the most benign environment we've seen for many years in terms of overall impairments."

Westpac's future profit growth would need to come from increased revenue rather than decreased impairments.

"Our aim is to grow our customer base and to grow the number of products that our customers have with us," McLean said. "The way we'll do that is through things like investment in digital and self-serve [technology] that makes things as easy as possible for the customer."

The bank's full-year cash profit of $864 million was a 13 per cent increase on the $768 million it reported a year earlier.

Westpac NZ's Australian parent, Westpac Banking Corporation, reported an 8 per cent rise in annual cash profit to a record A$7.6 billion.

Cash profit, as opposed to net profit, excludes items that introduce one-off distortions. Westpac NZ said it had made a smooth transition to the Reserve Bank's loan-to-value restrictions on mortgages, with net loans increasing 5 per cent to $64.6 billion.

Deposits lifted 6 per cent to $49.4 billion, while Westpac NZ's net interest income rose 2 per cent to $1.6 billion, the bank said.

McLean said that although the recent slump in global dairy prices would have a negative impact on some New Zealand regions, other areas of the economy such as the construction industry - especially in Canterbury - were showing solid growth.

"Confidence has moderated somewhat, but businesses are continuing to hire and invest," he said.

"While we do expect reasonable economic growth in New Zealand over the year ahead, we are wary further out of slowdowns later in the decade, particularly when the Christchurch rebuild tapers off."