KEY POINTS:
Westpac New Zealand's blunder in hanging back from the "mortgage wars" cost it profits and market share, says chief executive Ann Sherry.
The bank, New Zealand's second largest after ANZ National, said its net profit for the year to September fell 3.5 per cent to $639 million.
When last year's $662 million net profit is adjusted for the effect of recently introduced international financial reporting standards and $39 million in tax benefits from discontinued structured finance deals, yesterday's figure is a 10 per cent increase.
The result was boosted by a strong performance from its institutional business, where operating income rose by 12.5 per cent.
Another strong division was business banking, which increased its revenue by 8 per cent.
Excluding institutional banking, where the effect of the new reporting standards was most felt, the year was a flat one for Westpac with a net profit of $464 million, against $463 million a year ago.
"While this result reflects a tough operating environment, we were disappointed that we did not realise the full potential of our consumer franchise," the bank's Australian parent said.
The flat performance came despite bank deposits growing by 9 per cent to $19.9 billion, net loans growing 13 per cent to $32.3 billion and and total assets growing by 13 per cent to $34 billion.
Sherry denied that Westpac's retail banking profit had declined - the bank does not reveal any figures for this - but admitted that the division had "gone backwards".
Westpac last month disclosed the factors that had affected its New Zealand market share and earnings.
They included shifts in its mortgage book from floating to fixed rate loans, declining non-interest income as customers moved to lower-fee options and customer attrition as consumers sought more favourable deals from rivals.
"We have put a great deal of effort into understanding the reasons behind customer attrition and the causes of slowing revenue growth," said Sherry.
Last month, she told analysts the bank's market share had suffered from its "undue focus on profitability at the expense of competitiveness".
Yesterday, she said the bank had been reluctant to compete with rivals for two-year fixed-rate home loans, the main battleground between banks over the past two years, because it believed the competition was not sustainable.
But having realised its mistake, it had taken steps to expand its consumer operations.
It was competing more vigorously for market share but, as with its rivals, the competition had eroded the margin it earned on home loans.
"In the first half we had very big margin compression and low net interest income growth; in the second half there was less margin impact and better net interest income growth."
Sherry said the bank was encouraged by a strong fourth quarter, when it won more customers than it was losing, "for the first time, probably, since the acquisition of Trustbank".
"Many of those are customers who are coming back to us and that's a very positive sign."
During the September quarter, the bank's share of mortgage lending had grown faster than the overall market, "for the first time since the price war".
Massey University head of banking studies David Tripe said the bank had become "a bit more aggressive".
"But I'm not sure a whole lot more ... we'll wait and see on that front."
Sherry said Westpac's local incorporation to meet Reserve Bank requirements, which took effect on Wednesday, would have no material effect on next year's result.
