KEY POINTS:
The Bank of New Zealand says it is reaping the rewards of moving to a more conservative lending approach well before the housing market and economy began to slow.
National Australia Bank-owned BNZ reported a 14.9 per cent increase in March half underlying net profit for its core local businesses, outstripping the 12 per cent and 6 per cent increases posted recently by two of its three big rivals, Westpac and ANZ National.
While the BNZ was instrumental in fanning the fierce competition for mortgage market share during the recent period of rampant house-price inflation, it has become far more cautious over the past two years.
In particular it has shied from riskier sectors including high loan to value mortgages, and speculative property development loans, sacrificing some market share in the process.
"We're probably seeing some dividend from that," said BNZ chief executive Cameron Clyne, commenting on his bank's $239 million March-half cash earnings.
While Westpac and ANZ National's credit impairment costs rose by 45 per cent and 108 per cent respectively compared with the previous corresponding period, BNZ's rose far more slowly at 15 per cent to $30 million.
"Managing that line is equally important as managing our cost and income lines and that delivers the cash earnings growth we've had."
Growth in cash earnings since September at 7.7 per cent looked very rosy compared with Westpac's 2 per cent and ANZ National's 0.5 per cent fall.
But with clear signs that the economy is slowing rapidly, Clyne expected credit impairment charges to increase as more homebuyers and businesses struggle to meet repayments and overall growth in cash earnings to ease.
Furthermore, while another rival, ASB Bank, yesterday cut some of its key fixed-term mortgage rates, Clyne said the overseas financial market turmoil, which has pushed rates higher this year squeezing borrowers, was unlikely to abate any time soon and rates might go higher still.
"International markets are showing some signs of easing but they remain jittery and events can change that quite substantially."
Clyne said the United States Federal Reserve's response to the near collapse of US investment bank Bear Stearns in March probably marked the low point for the markets.
"Even if that was the bottom there is still potentially 12, 18 or 24 months of difficult credit market conditions. The markets remain fragile."
Another shock, particularly out of the US, could cause them to lock up again. "There have been a few false dawns. We would not be saying that this is the end by any means."
Clyne said softer economic data, including this week's jobs number, would likely see the Reserve Bank begin easing the official cash rate sooner than previously indicated, perhaps in September, but that would have little effect on fixed-term mortgage rates, which would remain driven by overseas market conditions.
Meanwhile, including its insitutional division, gains on financial instruments and one-offs such as the gain on shares sold in the recent Visa initial public offer, BNZ's net profit for the period was $416 million.
Institutional banking's revenues rose 18 per cent to $140 million. Excluding institutional, net interest income rose by 11.6 per cent to $539 million, with the bank's net interest margin easing two basis points to 2.49 per cent. Average lending volumes were up 11.1 per cent to $42.1 billion, and deposits were up 8.3 per cent to $22.2 billion.
