ASB says rates set to rise rather than fall

Despite leading a round of mortgage rate cuts last week, ASB Bank managing director Hugh Burrett believes fixed home lending rates are more likely to rise than fall over coming months.

The bank, a subsidiary of the Commonwealth Bank of Australia, yesterday reported a 16 per cent increase in full year net profit to $440 million. Burrett said the bank had continued to grow strongly across mortgage lending, corporate and rural banking at the same time as reducing overheads.

That was despite operating in what he described as "probably one of the most competitive markets in the world for banking".

Much of that competition has focused on the home lending market where banks have been engaged in a sporadic "mortgage war" over the last two years, trying to grab market share by undercutting fixed mortgage rates.

Burrett said the bank had last week led the market by cutting its fixed home loan rates. Other banks have since followed, sparking speculation that another chapter in the mortgage war is beginning.

A $10 billion to $12 billion chunk of fixed rate mortgages written at the start of the war two years ago is coming up for refinancing later this year and some believe competition is again about to become white hot.

But Burrett downplayed the significance of ASB's move last week.

"We took a view on interest rates and where things were going and wanted to remain competitive."

However, he did not believe the recent cuts were the first of a string of reductions.

Fixed rates, while a reflection of the domestic market to some degree, were also a reflection of what was happening overseas.

"So if interest rates are going to go up offshore it's more than likely that our fixed rates could go up over time.

"At present, our Reserve Bank appears likely to keep its key interest rate at its present level at least until April. Meanwhile, overseas interest rates look likely to continue to rise as central banks around the world strive to control rising inflation.

"You're part of a global scene so fixed rates definitely could move around," said Burrett.

Meanwhile, as a result of the intense competition, banks have seen their interest margins, essentially the profit on lending, come under pressure.

ASB has been no exception. Chairman Gary Judd said the bank's interest margin of 1.9 per cent, compared with 2.2 per cent last year, was "the lowest recorded by the bank in modern times, and underlines the extremely competitive nature of New Zealand banking".

But Burrett said the declining margins had been offset by growth in mortgage lending, up 16 per cent to $29.2 billion, and other areas of business including corporate (up 42 per cent) and rural banking (up 15 per cent).

Burrett attributed this to his bank's "sustained growth over time" and to its "great customer service and great products, which is really our technology platform and the innovation we bring to that".

That view was vindicated in a survey released recently by investment bank Merrill Lynch which rated ASB as the country's top retail bank, based on customer satisfaction, attrition, acquisition and customers likely to be unprofitable.

Burrett also said the bank's result was aided by a strong performance by its treasury operations and a reduction in overheads. Its expenses to total operating income ratio had fallen to 43.1 per cent, from 45 per cent last year.