Bad debt charges weigh on BNZ's first-half result

Increases in bad debt charges will continue to weigh on Bank of New Zealand's profitability for at least the next 18 months, it said yesterday as it announced a 4.6 per cent decline in its first-half result.

While the National Australia Bank-owned BNZ's core retail and business banking operation's underlying profit for the six months to March 31 at $417 million was up 11.2 per cent on a year earlier, a leap in charges for bad and doubtful debts from $30 million to $96 million dragged the bottom line to $228 million from $239 million last year.

The rapid deterioration was first signalled by the bank in a trading update in February but while much media attention on all four major banks' escalating loan losses has tended to focus on distressed homebuyers, BNZ chief executive Andrew Thorburn told the Business Herald yesterday the most important factor had been "a few larger loans".

"Most of the industry hot spots are in property - commercial property and land banks. There's been some deterioration in retail, but most of it has been in a few transactions."

Thorburn said the increase reflected the deterioration in the economy and said loan losses were increasing off all-time lows and had yet to rise to anything approaching alarming levels.

BNZ had been stress testing its balance sheet and was reassured.

"We certainly have strong provisions to be able to withstand any further write-offs that we could see come through in the second half of 2009 and into 2010."

It was difficult to say where and when bad debt charges would peak.

"I think it's going to be a difficult 12 months so we just have to work through that." Nevertheless, Thorburn hailed the result as "solid" given the tough economic conditions.

BNZ's average lending volumes had increased by 14.3 per cent to $48.1 billion with strong growth still being seen in business and rural lending, however net interest income was up by just 2.6 per cent.

Chief financial officer Ken Christie said the bank had been contending with "brutal" competition for retail deposits which rose 6.3 per cent to $23.6 billion. That, with disrupted international credit markets, saw BNZ's net interest margin fall by 26 basis points to 2.23 per cent.

BNZ also incurred costs associated with the Government's retail deposit guarantee and the additional expense of buttressing its balance sheet by lengthening the term of its wholesale funding and holding increased liquidity.

Some of this was offset by early repayment charges on fixed mortgages broken by borrowers seeking more favourable rates.

While this had an initially positive effect on the bank's profit and loss, it would affect future net interest income.

Operating expenses were held flat which, with growth income, reduced BNZ's cost to income ratio by 310 basis points to 44.7 per cent.

Including the local arms of parent National Australia Bank's institutional and global capital businesses, BNZ's New Zealand profit was $400 million, down 3.8 per cent on a year earlier.

Christie said the institutional business had enjoyed strong demand from clients wishing to manage foreign exchange and interest rate risk.

BNZ intended to raise government guaranteed term funding offshore within the next six to 12 months but in the meantime had securitised $6.5 billion worth of mortgages and so far had raised money from the Reserve Bank using $2.5 billion worth of these.

"We would want to keep our powder dry on the balance as a safeguard," said Christie.


PROFIT DIPS

BNZ* six months to March 31

Net operating income

2009: $755m
2008: $718m

Operating expenses

2009: $338m
2008: $343m

Underlying profit

2009: $417m
2008: $375m

Bad and doubtful debt charges

2009: $96m
2008: $30m

Net profit

2009: $228m
2008: $239m

* Excludes institutional division and NAB Capital