Drop in dollar helps Westpac profit rise

Westpac, New Zealand's second-largest bank, harnessed the power of the plunging kiwi to produce a 14 per cent increase in underlying net profit during the March half-year even as the local economy slowed.

The bank's operating profit for the half-year ended March 31 was $333 million once non-recurring items and the impact of new accounting standards were excluded.

"This result was largely driven by a strong performance by Westpac Institutional Bank, while our core retail business grew by 4 per cent during a period when the New Zealand economy began to cool markedly," said Westpac NZ chief executive Ann Sherry.

Sherry said trading and other opportunities arising from volatility in the New Zealand dollar spurred a strong performance from its institutional division's local operations, with trading income up 37 per cent up on the March 2005 half.

Furthermore she indicated the bank was expecting to benefit from more falls by the kiwi.

"One would never lock in trading performance as a sure bet but I think we can expect to see plenty of activity if the currency does move as people are anticipating."

Westpac, which claims it did not participate in the recent mortgage rate wars, managed to retain its 18 to 19 per cent share of the home lending market during the half. Growth in housing lending volumes of 13 per cent was in line with the overall sector.

However, interest margins on home lending fell by a quarter of a per cent as the mix of fixed and floating lending shifted further towards fixed "in a highly competitive lending environment".

"In our housing book we've shed more margin than perhaps anyone else in the market because we had so much of our housing on floating a year ago and we've had a very significant shift to fixed mortgages. We're looking now more like the market. A year and a half ago, just over 60 per cent of Westpac's home lending was at fixed rates, now it's up to about 78 per cent."

Sherry believed the squeeze on home lending interest margins was now largely finished despite predictions of fresh outbreak of mortgage rate skirmishing as significant amounts of fixed-rate lending came up for renewal this year.

"As we look forward we will continue to see pressure and competitiveness in the mortgages space but I don't think it will have such a big impact on interest margins, this has probably been the 12 to 18 months of really big impact."

Elsewhere, the bank's deposits rose by 5 per cent to $28.2 billion, supported by growth in its online savings offering.

Non-interest income fell by 10 per cent to $270 million as customers became "more responsive to fees".

Meanwhile, growth in expenses was kept relatively low at 2 per cent with staff and salary increases including 145 new frontline staff being offset by spending in other areas of the business and lower outsourcing costs.

The bank's income tax expense for the half was $162 million, up significantly on the $92 million for the same period a year ago.

The increase was a result of the bank's structured finance deals coming to an end. Its effective tax rate for the half was 32.6 per cent, just a shade below the headline corporate tax rate.

Sherry said local incorporation of Westpac was proceeding smoothly.