KEY POINTS:
The risk premium on funds raised by local banks on international markets has likely peaked and mortgage rates should ease as the Reserve Bank cuts the OCR over the next year, says ASB Bank chief executive Hugh Burrett.
ASB, owned by Australia's largest bank, Commonwealth Bank of Australia, yesterday reported June year results indicating it was coping relatively well with a sharp slowdown in the housing market and the wider economy.
It reported a net profit of $515 million for the year to June, down 3.2 per cent on the previous corresponding period.
Stripping out the impact of mark-to-market revaluations of financial instruments as required under international financial reporting standards, ASB's profit was $532 million, up 11 per cent on last year.
Like CBA, which is headed by former ASB chief executive Ralph Norris, ASB appeared to be weathering tough economic times well.
"This was a very positive result in a challenging market with aggressive competition continuing to place downward pressure on margins and a general slowing in economic activity," CBA said of its New Zealand subsidiary's performance.
ASB stoked that competition last month by trimming its key two-year fixed mortgage rate after the Reserve Bank cut the official cash rate. Before the Reserve Bank cut, some of ASB's rivals said the higher cost of funds on international markets meant downward moves in the OCR would not necessarily mean lower mortgage rates.
But Burrett yesterday said further increases in the credit crisis-related risk premium banks paid for offshore money were unlikely. "I can't see it going much higher."
Risk premiums would likely remain steady and the Reserve Bank's influence over retail interest rates would be re-established.
"If the Governor keeps reducing interest rates I think we'll see deposit rates and mortgage rates gradually reduce over the next year."
While Burrett said middle New Zealand was clearly hurting from high interest rates, and rising fuel and food prices, the local economy was "fundamentally pretty sound". The falling dollar and low unemployment rate would help cushion the economy from a damaging recession.
"I think we'll work our way through it over the next six to 12 months."
Nevertheless, ASB has not been immune to pressures. Specific provisions for loans that have gone bad were three times higher than a year ago at $22 million. That said, they remained low relative to total assets of $59.35 billion.
Burrett said bad debt charges could rise further from these levels.
"If the economy continues to go south and get harder and tighter then I guess we'll all suffer a little, but that's business."
He estimated housing finance activity was down "about 50 per cent" on last year in terms of actual dollar amounts and number of loans. ASB's home loan balances rose by 9 per cent over the year while its share of what is now a $152.1 billion market was up to 23.3 per cent, from 23.1 per cent.
Retail deposits grew strongly, by 13 per cent to $27.8 billion, helping to offset some of the increase in costs of funds from other sources, including international markets.
