Mortgage price war squeezes ASB's margins

ASB Bank's half-year results, released yesterday, revealed the first evidence of the impact of the pre-Christmas mortgage price war on banks' bottom lines.

In the half-year to December 31, ASB's interest margin fell to an all time low of 2.18 per cent, down from 2.28 per cent at December 31, 2003. ASB is the first major bank to report results since the price war.

Banks make 70 to 80 per cent of their money from interest. With margins being squeezed, there is less money available to cover costs such as branch networks and processing transactions.

Managing director Hugh Burrett said losing revenue was always a concern but it was a trend ASB had lived with for some time.

"What we have got to do is make sure we keep on growing the business because volume [of business] picks up the reduction in margin," Burrett said.

ASB's net profit for the six months to December 31 rose 14.6 per cent to $183.2 million, from $159.8 million in the same period of 2003.

ASB said profit was boosted by "robust" growth.

Net interest income rose to $383.4 million from $330 million and total assets to $36.6 billion from $30.4 billion.

During the December quarter BNZ ran an "unbeatable" campaign in the two-year fixed home loan market. BNZ offered loans at 6.9 per cent interest, meaning it charged customers at rates less than 0.3 per cent above its own cost of funds. ASB offered two-year loans at 6.95 per cent.

Burrett said the price war cut ASB's profit margin on two-year home loans to about 0.2 per cent from about 1 per cent. From that 0.2 per cent, ASB had to cover its costs before counting any profit.

"Our margins I think show that people are probably getting a pretty good deal," Burrett said.

In fact, ASB maintains New Zealanders enjoy the most competitive banking market of any similar economy in the world.

However, David Tripe, Massey University's senior lecturer in banking studies, said this was difficult to measure because the nature of banks' business differed from country to country.

ASB said it underwrote 30 per cent of home lending growth in December with the vast bulk coming in the two-year fixed home loan market. BNZ claims 26 per cent and values this at $345 million.

Burrett said he would be interested to see how the remaining 44 per cent of business was split among other banks.

He said ASB would retain competitive mortgage rates but did not need to lead any resumption of the price war.

Tripe said other banks' margins will be similarly squeezed when they report results. He suggested margins were likely to get even worse.

Burrett said he was confident ASB could continue the past year's growth through 2005.