Banking perspectives / Major banks analysis / August 2015
PwC analysis of the major banks’ results for the first half of their 2015 financial years
Can New Zealand’s
banks sustain
strong performance
and good lending
growth?
pwc.co.nz/bankingperspectives
Introduction
New Zealand’s five major banks reported
core earnings of $3,480 million in the first
half of their 2015 financial years (1H15),
up from $3,281 million for the previous
six months (2H14). This was driven by
increases in net interest income (up
by $184 million) and a reduction in
operating expenses (down by $49
million), while other operating
income decreased by $34 million.
Following an increase in bad debt
expenses (up by $54 million), profit
before tax was up 5 per cent (or
$145 million) to $3,299 million
and profit after tax was up 4 per
cent (or $92 million) to $2,372
million.
2 PwC
The results show another strong
performance by our major banks on the
back of good lending growth to both the
household and non-household sectors.
The lift in lending by circa $10 billion over
the past six months, combined with the $7
billion for six months earlier has generated
the lift in net interest income growth of
around $184 million. The demand for credit
over this twelve month period has been very
strong when compared to recent times.
The previous positive lift in other operating
income has now slightly reversed which
reflects our comments in our previous
report – this isn’t a quality income story but
more reflective of gains and losses being
recognised on financial instruments held at
fair value. As we have previously said, this
is effectively a zero-sum game from period
to period and the swings in the fair value of
financial instruments have contributed to
the earnings volatility of our major banks.
The reduction in operating expenses also
aided the lift in profitability for the period.
However, this was more a story of higher
costs in 2H14 due to one-off charges.
Interestingly, the banks’ operating expenses
for the first half of their 2015 financial
years was up against the comparable period
twelve months ago.
One continuing trend from six months ago is
further bad debt expenses being recognised
when compared to the previous six months.
When looking at the underlying asset quality
of the lending portfolios, there has been a
gradual deterioration in stressed loans as
well as those assets that are 90-days past
due (an early indicator for stressed loans).
Looking forward, it will be a question
of whether this performance can be
sustained. The strong economic conditions
experienced over the past two years are
predicted to slow in the short to medium
term, but nevertheless comparably positive
on a global scale. This combined with a hot
property market in Auckland and difficult
trading conditions for our rural community
and those that service it, we are about to
embark on an interesting journey.
This publication focuses on the major
banks’ (ANZ Bank New Zealand, ASB,
Bank of New Zealand, Kiwibank and
Westpac) performance for the first
half of their 2015 financial years with
reference to the previous six months.
Can New Zealand’s banks sustain strong performance and good lending growth?
3
This journey will be further enhanced by
forecasted changes to the official cash rate
(OCR) which will be of some benefit to New
Zealand borrowers but, equally, it will be
of little comfort to depositors should they
experience falling deposit rates. This combined
with volatility in the wholesale funding
markets means the lending market will remain
competitive but the inherent value of customer
deposits will remain.
This evolving technological world has
already resulted in the explosion of financial
technology (FinTech) entities in various
regions around the world. It also means a
global bank could potentially enter our local
market without the need to invest in bricks and
mortar. Instead, a global bank could leverage
its brand and establish a presence through an
online branch targeting a niche segment of our
market.
The technology race we’ve previously
discussed will continue to evolve. It is a game
changer to the global banking sector which, if
harnessed correctly, will drive better customer
experiences and outcomes.
Against the backdrop of technological
enhancement, while any possible changes to
the market will not be extensive in the shortterm, it will have an impact across the New
Zealand market in the longer term. In any
sector or organisation, technology can be seen
as a challenging disruptor or viewed as the key
to unlock future value. From the perspective of
New Zealand’s major banks, which side of coin
will be face up when this finally lands?
4 PwC
When looking at
the underlying
asset quality
of the lending
portfolios,
there has been
a gradual
deterioration in
stressed loans
as well as those
assets that are
90-days past
due.
Five major banks’
combined performance
Semi-annual results
Comparing 1H15 with 2H14 we see
a 4 per cent rise in statutory profit
from $2,280 million in 2H14 to
$2,372 million in 1H15. Profit before
tax increased by 5 per cent to $3,299
million in the same period.
The main driver for this increased profit is the
5 per cent increase in net interest income. Net
interest income grew from $3,989 million in
2H14 to $4,173 million in 1H15. This growth
of 5 per cent is positive for the banks which is
driven by lending growth during the period of
3.2 per cent.
Other operating income continues to show
volatility as a result of the revaluation of
financial instruments carried at fair value
with a 2 per cent decrease in 1H15. Operating
expenses also fell 2 per cent in 1H15 to $2,197
million with each of the New Zealand majors
either showing a stable or reducing cost base
when comparing 1H15 to 2H14.
Bad debt expenses have shown another
increase, up 43 per cent to $181 million,
suggesting that we are now past the low point
of bad debt expenses experienced during
1H14. However this should not be raising any
alarm bells as this level of bad debt expense is
still comparatively low compared to pre-2014
amounts.
5
Table 1: Half-year income statement comparisons (NZ$ millions)
1H15
2H14
1H14
1H15v2H14
1H15v1H14
Interest income
10,661
10,030
9,333
6%
14%
Interest expense
(6,488)
(6,041)
(5,474)
7%
19%
4,173
3,989
3,859
5%
8%
Net interest income
Other operating income
Operating expenses
1,504
1,538
1,360
(2%)
11%
(2,197)
(2,246)
(2,136)
(2%)
3%
3,480
3,281
3,083
6%
13%
(181)
(127)
(14)
43%
1193%
3,299
3,154
3,069
5%
7%
(917)
(864)
(835)
6%
10%
(10)
(10)
(8)
0%
25%
2,372
2,280
2,226
4%
7%
Core earnings
Bad debt expenses
Profit before tax
Tax expenses
Outside equity interest
Statutory profits
Figure 1: Banks' change in profit after tax
2,500
NZ$ millions
2,250
2,000
1,750
1,500
1,250
1,000
Net interest
income
Other
operating
income
Operating
expenses
Bad debt
expenses
Tax
expenses
4,200
340,000
4,000
320,000
3,800
300,000
3,600
280,000
3,400
260,000
3,200
240,000
3,000
1H15
2H14
1H14
2H13
1H13
2H12
1H12
2H11
1H11
2H10
1H10
2H 0 9
200,000
1H09
2,600
2H 0 8
220,000
1H08
2,800
Net interest income (LHS)
6 PwC
Profit after
tax 1H15
Loans and advances to customers (RHS)
NZ$ millions
NZ$ millions
Profit after
tax 2H14
Can New Zealand’s banks sustain strong performance and good lending growth?
7
2,500
NZ$ millions
2,250
2,000
1,750
Breaking down the numbers
1,500
1,250
1,000
Profit after
tax 2H14
Net interest income
Net interest
income
Other
operating
income
Operating
expenses
Bad debt
expenses
Tax
expenses
Profit after
tax 1H15
NZ$ millions
Net interest income continues to
increase and is up 5 per cent from
$3,989 million in 2H14 to $4,173
million in 1H15.
When analysing this, we note that interest
income is up $631 million to $10,661 million
for 1H15 and interest expense has increased
by $447 million to $6,488 million. As can be
seen in Figure 2, the growth in net interest
income continues to be consistent with the
growth in loans and advances to customers
which has increased by $9,943 million (3.2
per cent) to $325,161 million in 1H15.
4,200
340,000
4,000
320,000
3,800
300,000
3,600
280,000
3,400
260,000
3,200
NZ$ millions
Figure 2: Net interest in relation to customer loans and advances
240,000
3,000
Net interest income (LHS)
This continued growth in net interest
income is due to the sustained growth in
lending during the period and continuation
of low funding costs.
1H15
2H14
1H14
2H13
1H13
2H12
1H12
2H11
1H11
2H10
1H10
2H 0 9
200,000
1H09
2,600
2H 0 8
220,000
1H08
2,800
Loans and advances to customers (RHS)
3.25
3.00
2.75
2.50
2.25
2.00
Net interest margin (NIM) (%)
15.0%
10.0%
5.0%
8 PwC
0.0%
014
015
Mar 2
Mar 2
013
Mar 2
012
Mar 2
011
Mar 2
010
Mar 2
009
Mar 2
0 08
Mar 2
0 07
Mar 2
006
Mar 2
0 05
Mar 2
0 04
Mar 2
0 03
Mar 2
0 02
Mar 2
0 01
Mar 2
000
Mar 2
Mar 1
999
Mar 1
998
Mar 1
997
1.75
2,500
NZ$ millions
2,250
2,000
1,750
1,500
1,250
1,000
Operating
expenses
260,000
1H15
2H14
This, in aggregation, indicates a
240,000
continuation of low interest rates.
At the
time of this report, we are already
seeing
220,000
short to medium term mortgage carded and
200,000
special rates considerably below
5 per cent,
which are the lowest rates available for a
number of years.
1H14
2H11
1H11
2H10
1H10
2H 0 9
1H09
2H 0 8
1H08
Net interest income (LHS)
Profit after
tax 1H15
NZ$ millions
NZ$ millions
This is due
to low wholesale funding
3,400
costs and close interest rate management,
partially 3,200
offset by the continued change
in lending
mix. Customers prefer fixed3,000
rate mortgages which typically have lower
2,800
margins as well as competitive pressures for
2,600which have lowered lending
new lending
margins, especially in the residential
mortgage market.
Tax
expenses
The outlook for 2H15 is mixed, in part due
to intense competition for new340,000
lending
hitting these margins, a decrease in short320,000 Bank’s
term interest rates due to the Reserve
decrease in the OCR and lower300,000
wholesale
funding costs, with economic commentators
forecasting further interest rate
cuts for the
280,000
rest of the 2015 calendar year.
As Figure 3 shows, net interest
margins4,200
continue to remain
4,000
relatively
flat with a decrease
during 3,800
1H15 from 2.35 per cent to
2.34 per3,600
cent.
2H13
Net interest margin
Bad debt
expenses
1H13
Other
operating
income
2H12
Net interest
income
1H12
Profit after
tax 2H14
Loans and advances to customers (RHS)
Figure 3: Net interest margins remain flat with a slight decrease
3.25
3.00
2.75
2.50
2.25
2.00
015
Mar 2
014
Mar 2
013
Mar 2
012
Mar 2
011
Mar 2
010
Mar 2
009
Mar 2
0 07
0 08
Mar 2
Mar 2
006
Mar 2
0 05
Mar 2
0 04
Mar 2
0 03
Mar 2
0 02
Mar 2
0 01
Mar 2
000
Mar 2
Mar 1
999
Mar 1
998
Mar 1
997
1.75
Net interest margin (NIM) (%)
Source: Reserve Bank of New Zealand
15.0%
10.0%
5.0%
Can New Zealand’s banks sustain strong performance and good lending growth?
9
4,000
320,000
3,800
300,000
3,600
280,000
3,400
260,000
3,200
240,000
1H15
2H14
1H14
2H13
1H13
015
014
Mar 2
Mar 2
013
Mar 2
012
Mar 2
011
Mar 2
010
Mar 2
009
0 08
Mar 2
Mar 2
Mar 2
Mar 2
Mar 2
Mar 2
Mar 2
006
2H11
0 05
0 04
0 03
0 02
0 01
000
Mar 1
999
Mar 1
998
Household lending grew by 2.6 per cent
during 1H15, increasing from $200.4 billion
to $205.6 billion during the same period.
The proportion of household lending with
loan-to-value ratios (LVR) above 80 per cent
has decreased to 14.5 per cent in 1H15 from
15.9 per cent in 2H14. This further shows
the impacts of the RBNZ’s speed limits to
high LVR lending as it aims to reduce the
risks associated with any property price
correction going forward.
Mar 2
1H11
2H10
1H10
2H 0 9
1H09
2H 0 8
1H08
What is most interesting is that corporate
lending has continued to grow, up 4.1
per cent between 1H15 and 2H14, the
3.00
highest since the late 2000s. This reflected
the continued business and economic
2.75
confidence at this time. The depreciation
of the New Zealand dollar against the US
2.50
dollar has helped provide relief to exporters
along with the continued low interest
2.25
rates being experienced. On the flip side, a
2.00
weaker dollar will create pressure on import
costs, which may manifest itself in rising
1.75
domestic prices in the long term.
3.25
Mar 2
2,600
Gross lending stood at $325.2
billion at the end of 1H15 from
$315.2 billion atNetthe
end of 2H14.
interest income (LHS)
This reflects a growth of 3.2 per cent
in the six-month period.
This is up from the 2.3 per cent growth
220,000
rate experienced during 2H14 and can be
partially attributed to the low200,000
interest rates
being offered for mortgages to drive volume
growth, ongoing supply constraints and
net immigration which have all continued
Loans and advances to customers (RHS)
to drive up property prices, particularly
in Auckland. Many will be watching the
Reserve Bank of New Zealand’s (RBNZ) new
asset class treatment for residential property
investors and the impact it will have after it
is expected to come into effect on 1 October
2015, particularly in regards to household
lending growth. At this stage, the increasing
residential property sector will continue to
provide the tail wind for lending growth for
the time being.
2H12
2,800
0 07
Lending
1H12
3,000
Mar 1
997
NZ$ millions
340,000
Mar 2
NZ$ millions
4,200
Net interest margin (NIM) (%)
Figure 4: Corporate and household lending growth
15.0%
10.0%
5.0%
0.0%
-5.0%
Corporate
225,000
NZ$ millions
200,000
10 PwC
175,000
150,000
125,000
100,000
75,000
Household
15
1H
14
2H
14
1H
13
2H
13
1H
12
2H
12
1H
11
2H
11
1H
10
2H
10
1H
09
2H
09
1H
08
2H
1H
08
-10.0%
3.25
3.00
2.75
2.50
2.25
•no change on the 10 per cent speed limit
for other residential mortgage lending for
Auckland with LVR above 80 per cent; and
15.0%
•increasing the speed limit from 10 per cent
to 15 per cent for residential mortgage
lending with LVR greater than 80 per cent
for home buyers outside of Auckland.
10.0%
5.0%
In addition to these LVR amendments,
the RBNZ is proposing a new asset class
treatment for capital adequacy for residential
property investment loans. Under these rules,
the banks would be expected to hold further
capital for residential property investment
loans.
0.0%
-5.0%
015
014
Mar 2
013
Mar 2
012
Mar 2
•require property investment residential
mortgage
loans in the Auckland region
Net interest margin (NIM) (%)
with an LVR of no more than 70 per cent;
The continued shift from floating to fixedrate mortgages have continued into 2015.
At September 2014, 14.8 per cent of the
mortgage lending portfolio was at fixed rates
over two years and this has remained in line
with March 2015 at 15 per cent. The level of
floating rate mortgages has decreased from
29 per cent at September 2014 to 27 per cent
at March 2015.
Mar 2
011
Mar 2
010
Mar 2
009
0 08
Mar 2
0 07
Mar 2
Mar 2
006
Mar 2
0 05
Mar 2
Mar 2
0 03
0 02
Mar 2
Mar 2
0 01
Mar 2
000
Mar 2
Mar 1
999
Mar 1
998
Mar 1
997
1.75
0 04
With the continued rising property prices in
Auckland which has been seen as a cause for
concern, the RBNZ is currently proposing
amendments to LVR rules to come into effect
on 1 October 2015:
2.00
Most interestingly, the biggest increase has
been in the one to two year fixed rates which
has increased from 24 per cent in September
2014 to 30.3 per cent at March 2015. This
reflects the greater discounted rates being
offered by the banks in the market to drive
volume growth and borrowers locking in
fixed rates in the short to medium term as
well as keeping their options open should
market speculation of further interest rate
cuts eventuate.
14
15
1H
1H
2H
14
13
2H
13
1H
12
2H
12
1H
11
2H
11
1H
10
2H
10
1H
09
2H
09
1H
2H
1H
08
08
-10.0%
Figure 5: The shift from floating to
fixed-rate mortgages
Corporate
Household have continued into 2015
225,000
NZ$ millions
200,000
175,000
150,000
125,000
100,000
75,000
50,000
25,000
Floating
<1 year
1-2 years
M
ar
15
14
Se
p
M
ar
14
13
Se
p
M
ar
13
12
Se
p
M
ar
12
11
Se
p
M
ar
11
10
Se
p
M
ar
10
09
Se
p
M
ar
09
08
Se
p
M
ar
08
0
>2 years
Source: Reserve Bank of New Zealand
15,000
10,000
Can New Zealand’s banks sustain strong performance and good lending growth?
11
200,000
150,000
175,000
NZ$ millions
125,000
ar
12
M
Se
p
M
ar
12
11
Se
p
1-2 years
<1 year
1-2
Figure 6: More money ($678 million) was lent to customers than
deposited in 1H15
The funding for the banks continue to
grow from $333.0 billion at the end
of 2H14 to $340.2 billion at the end of
1H15, which represents an increase of
2.2 per cent.
15,000
15,000
10,000
5,000
0
-5,000
-10,000
0
-5,000
1H
10
2H
10
1H
11
2H
11
1H
12
2H
12
1H
13
2H
13
1H
14
2H
14
1H
15
1H
0
9
09
1H
10
2H
10
1H
11
2H
11
1H
12
2H
12
1H
13
2H
13
1H
14
2H
14
1H
15
Net cash inflow/outflow
2H
08
2H
1H
0
8
2H
9
8
08
-15,000
2H
1H
0
09
-10,000
-15,000
1H
0
Interestingly, wholesale funding decreased
by $2.1 billion during 1H15 to $102.9 billion
which is largely because of a decline in amounts
due to central bank and other financial
institutions by $5.4 billion to $12.8 billion.
This is partially offset by other money market
deposits, bonds and notes which have increased
by $1.7 billion to $74.3 billion.
5,000
NZ$ millions
NZ$ millions
10,000
This increase in funding, consistent with recent
periods, continues to be driven by continued
growth in deposits from customers. Deposits
from customers grew by $9.2 billion in 1H15 to
$237.3 billion and this now represents 69.8 per
cent of total funding (2H14: 68.5 per cent).
Net cash inflow/outflow
Figure 7: Deposits and wholesale funding continue growth
350,000
As seen in Figure 6, the growth in deposits
from customers in the period has not kept300,000
pace
with the increase in loans to customers, which
250,000
means the funding outflows have exceeded
the inflows by $678 million, a continuation of
200,000
the trend seen in 2H14. However this variance
of $678 million is not large in the context of
150,000
the total gross amount of funding and lending
growth experienced by the banks during 1H15.
350,000
NZ$ millions
The banks retail deposit-to-loan ratio has
50,000
increased from 72.4 per cent in 2H14 to 73.0
per cent in 1H15. With the second consecutive
0
period of new lending outpacing new retail
deposit funding, the banks will be required to
rely on wholesale funding or retained earnings
to fund further lending growth. The current
deposit-to-loan ratio of 73.0 per cent is well
above what was experienced by the banks prior
to the 2009 with the ratio at 56.3 per cent in
2H08 due to the need to comply with RBNZ’s
liquidity policies and the push for retail funding
to firm up their balance sheets.
250,000
200,000
150,000
100,000
1,500
1,250
1,250
750
500
1,000
millions
Z$ millions
1,000
750
500
Wholesale funding
1H
15
1H
14
1H
15
1H
13
1H
14
1H
12
1H
13
1H
12
Wholesale funding
Retail funding
1,500
1H
11
Retail funding
1H
10
1H
11
1H
0
8
1H
0
1H
0
9
1H
10
9
0
7
1H
0
1H
0
7
8
50,000
1H
0
NZ$ millions
300,000
100,000
12 PwC
13
12
Se
p
12
ar
11 M
M
ar
<1 year
Floating
Funding
11
10 S
ep
11
10
ar
Se
p
M
ar
10 M
08 M
M
ar
Floating
M
ar
09
Se
p
08
ar
M
0
09 S
ep
25,000
10
50,000
0
Se
p
25,000
ar
75,000
09 M
50,000
09
100,000
08 S
ep
75,000
Se
p
100,000
150,000
ar
125,000
08
NZ$ millions
175,000
NZ$ million
0
-5,000
-10,000
09
1H
10
2H
10
1H
11
2H
11
1H
12
2H
12
1H
13
2H
13
1H
14
2H
14
1H
15
9
2H
1H
0
2H
1H
0
8
08
-15,000
Other operating
income
Net cash inflow/outflow
350,000
Other operating income fell 2.2 per cent from $1,538 million in 2H14 to
$1,504 million in 1H15.
1H
15
• Other income decreased 51.4 per cent
from $74 million in 2H14 to $36 million
in 1H15. This is largely due to one of the
banks recognising a one-off gain in the
prior period on the sale of available-forsale equity securities which were not
repeated in 1H15.
1H
14
1H
0
Retail funding
1H
12
9
1H
10
1H
11
• Trading income increased 14.5 per cent
from $289 million in 2H14 to $331
million in 1H15.
8
Wholesale funding
Figure 8: Other operating income fell 2.2 per cent to $1,504 million in 1H15
1,500
1,250
1,000
750
500
250
0
-250
Total other operating income
Fee income
Fair value movements on
financial instruments
Other income
1H
15
2H
14
1H
14
2H
13
1H
13
2H
12
1H
12
1H
11
2H
10
1H
10
09
2H
9
1H
0
08
8
-500
2H
7
0
1H
0
50,000
• Negligible change in fee income, slightly
up by 0.8 per cent from $1,101 million in
2H14 to $1,110 million in 1H15.
1H
0
100,000
NZ$ millions
150,000
• Gains on financial instruments held at
fair value have decreased 63.5 per cent
from $74 million in 2H14 to $27 million
in 1H15.
1H
13
This decrease has been driven largely by a
decrease in gains on financial instruments
held at fair value and decrease in other
income, partially offset by increase in
trading income.
200,000
2H
11
250,000
1H
0
NZ$ millions
300,000
Trading income
54.0%
52.0%
50.0%
48.0%
46.0%
44.0%
42.0%
40.0%
Can New Zealand’s banks sustain strong performance and good lending growth?
13
200,000
150,000
100,000
50,000
Retail funding
1H
15
1H
14
1H
13
Expenses
1H
12
1H
10
9
1H
0
8
1H
0
7
1H
0
1H
11
0
Wholesale funding
1,500
Total other operating income
Fair value movements on
financial instruments
1H
15
2H
14
1H
14
2H
13
1H
13
2H
12
1H
11
2H
10
1H
10
09
2H
9
1H
0
2H
1H
0
8
08
-500
1H
12
750
Maintaining and controlling expenses
500
continues to remain a key focus for the
banks
while at the same time ensuring
250
investment for technology costs. Part of the
0
reason for the decreased expenses is due to
the banks
investments in digital technology
-250
which has enable productivity gains.
This reduction in costs coupled with the
growth in net interest income and other
operating income has reduced the cost to
income ratio from 40.6 per cent in 2H14
to 38.7 per cent in 1H15. However, as we
have previously pointed out, the changes in
fair value of financial instruments carried
at fair value has been a key influencer
to the variability of the major banks’
cost to income ratios. When you exclude
the volatility of gain/losses on financial
instruments recognised at fair value, the
cost to income ratio for New Zealand has
reduced from 44.1 per cent in 2H14 to 41.6
per
cent
in 1H15. Trading income
Fee
income
2H
11
NZ$ millions
Operating
expenses have decreased
1,250
2 per
cent from $2,246 million in
1,000
2H14 to $2,197 million for 1H15.
Other income
Figure 9: Cost-to-income ratios
54.0%
52.0%
50.0%
48.0%
46.0%
44.0%
42.0%
40.0%
New Zealand
1,500
NZ$ millions
1,000
500
14 PwC
New Zealand (excluding
fair value movements on
financial instruments)
1H
15
2H
14
1H
14
2H
13
1H
13
2H
12
1H
12
2H
11
1H
11
2H
10
1H
10
09
2H
9
1H
0
08
2H
1H
0
8
38.0%
1,500
1,250
NZ$ millions
1,000
750
500
Asset quality
250
0
-250
1H
15
2H
14
1H
14
2H
13
1H
13
2H
12
1H
12
2H
11
1H
11
2H
10
1H
10
09
9
2H
1H
0
2H
1H
0
8
08
-500
Escalating Auckland property prices have
The combined bad debt expense
been a cause of concern, especially if there is
Fee
income
Trading
income
for these New Zealand banks has
any significant price correction which would
Fair value movements on
income
increased to $181 Other
million
for 1H15, have some impact on New Zealand's overall
financial instruments
compared to $127 million in 2H14.
economy. The banks should be well secured
However this increase should not
and able to respond to such a scenario based
on their internal stress testing. The RBNZ
be raising any alarm bells as we
has recently proposed changes to the rules
are coming off a low base in 2H14.
for high-LVR mortgages expected to come
The increase in bad debt expense is
into effect from 1 October, where investors
predominantly due to an increase
in Auckland property would generally need
in the non-household bad debt
a 30 per cent deposit.
expenses which has increased by
Additionally, the continued low dairy
$38 million to $87 million in 1H15, commodity prices will be front of mind for
while the household sector has
the banks, but also all the other industries
which support the dairy sector. While the
increased by $16 million to $94
depreciation of the New Zealand dollar
million in 1H15.
Total other operating income
54.0%
52.0%
50.0%
48.0%
46.0%
44.0%
42.0%
1H
15
2H
14
1H
14
2H
13
1H
13
2H
12
1H
12
2H
11
1H
11
2H
10
1H
10
09
2H
1H
0
08
2H
8
1H
0
9
against the US dollar may partially offset
As shown in Figure 10, bad debt expense is
any commodity price movement, the
38.0%
coming off a low base from 1H14 and the
continued decrease in dairy commodity
low bad debt expense is a positive sign for
prices and market commentators forecasting
the New Zealand economy. However, risks
prices to remain low would challenge debt
New
New
Zealandand
(excluding
remain
inZealand
the Auckland property
market
serviceability for elements of the dairy
fair value movements on
low dairy commodity prices. financial instruments)sector (both directly and indirectly). It
would not be surprising if some of the banks
have included some additional provisioning
for their exposures to the dairy sector as a
Figure 10: Banks’ composition of bad debt expense
result.
40.0%
1,500
NZ$ millions
1,000
500
1H
15
2H
14
1H
14
2H
13
1H
13
2H
12
1H
12
2H
11
1H
11
2H
10
1H
10
09
2H
9
1H
0
08
2H
1H
0
8
0
(500)
Non-household
1.8%
1.6%
1.4%
1.2%
Household
0.6%
Can New Zealand’s banks sustain
strong performance and good lending growth?
0.5%
0.4%
15
500
1H
15
2H
14
1H
15
1H
14
2H
14
2H
13
1H
14
1H
13
Household
2H
13
2H
12
1H
13
1H
12
2H
12
2H
11
1H
12
1H
11
Non-household
2H
11
2H
10
1H
11
2H
10
09
1H
10
1H
10
9
2H
09
2H
2H
1H
0
08
8
1H
0
1H
0
2H
1H
0
0
(500)
9
08
0
8
NZ$ million
NZ
500
(500)
Non-household
1.8%
1.6%
0.6%
1.4%
1.8%
1.2%
1.6%
1.0%
0.5%
0.4%
0.6%
0.3%
0.5%
1.4%
0.8%
1.2%
0.6%
0.2%
0.4%
1.0%
0.4%
0.8%
0.2%
1H
10
2H
10
1H
11
2H
11
1H
12
2H
12
1H
13
2H
13
1H
14
2H
14
1H
15
09
9
1H
0
2H
2H
1H
10
2H
10
1H
11
2H
11
1H
12
2H
12
1H
13
2H
13
1H
14
2H
14
1H
15
09
2H
1H
0
2H
1H
0
9
0%
Impaired assets/gross loans and advances to customers (LHS)
Bad
debt expense/gross
loans and
advances
to customers
(RHS) (LHS)
90-day
past due assets/gross
loans
and advances
to customers
Impaired assets/gross loans and advances to customers (LHS)
90-day past due assets/gross loans and advances to customers (LHS)
Figure 12: Basis point loan loss provisions
200
150
200
Basis points
Basis points
100
150
50
100
Household
1H
15
2H
14
1H
15
1H
14
2H
14
2H
13
2H
13
1H
13
2H
12
1H
12
Non-household
1H
14
1H
13
2H
12
1H
12
2H
11
1H
11
1H
11
2H
10
2H
11
2H
10
1H
10
09
Household
1H
10
09
2H
9
1H
0
9
2H
08
1H
0
2H
8
1H
0
0
2H
08
0
8
50
1H
0
This $100 million increase in overall
provision is largely driven by one bank
that adopted the New Zealand Equivalent
to International Financial Reporting
Standard 9 (NZ IFRS 9) early during 1H15
and now recognises their impaired asset
expenses based on an expected loss model.
This resulted in their overall provisioning level
increasing by about $49 million or 12.3 per
cent on transition. It would be interesting to
see the quantum of the impact of the other
banks overall provisioning levels when they
eventually adopt NZ IFRS 9.
Bad debt expense/gross loans and advances to customers (RHS)
0.1%
0.0%
•impaired assets increasing marginally
from $1,584 million in 2H14 to $1,590
million in 1H15. Again, the 1H15 result
is the second-lowest since the GFC.
Impaired assets as a percentage of gross
loans and advances to customers is
relatively stable at 1H15 compared to
2H14 at about 0.5 per cent.
The banks overall provisioning levels have
increased by $100 million to $1,924 million
in 1H15. Non-household provisions have
increased by $106 million to $1,256 million
at 1H15, and this is partially offset by
household provisions which have decreased
by $6 million to $668 million.
08
0%
0.2%
08
0.2%
0.1%
0.3%
8
0.6%
0.0%
0.4%
8
•90-day past due assets increasing from
$582 million in 2H14 to $667 million in
1H15. However, it should be noted that
the 1H15 result is the second-lowest since
the Global Financial Crisis (GFC). Ninetyday past due assets as a percentage of
gross loans and advances to customers
at 1H15 is relatively stable compared to
2H14 at about 0.2 per cent; and
Household
Figure 11: Asset quality and bad debt expense
1H
0
When we look at the asset quality, it has
remained relatively consistent with 2H14
with:
Non-household
With this change in provisioning approach,
the ability to compare each of the bank’s
credit provisions will become more difficult
until all banks adopt NZ IFRS 9. However,
the directional movement in the overall
provisioning levels should be the same
14%
across all the banks.
13%
14%
12%
13%
10%
1H
15
2H
14
1H
14
2H
13
1H
13
2H
12
1H
12
2H
11
1H
11
2H
10
1H
10
09
2H
9
1H
0
10%
11%
2H
16 PwC
08
11%
12%
Impairedassets/gross
assets/grossloans
loansand
andadvances
advances to
to customers
customers (LHS)
Impaired
(LHS)
90-daypast
pastdue
dueassets/gross
assets/grossloans
loansand
and advances
advances to
to customers
customers (LHS)
90-day
(LHS)
Capital
200
200
Basis points
Basis points
150
150
100
100
22HH1
144
1
H
1H 1
155
11HH
1144
22HH
1133
11HH
1133
22HH
1122
1H
1H08
08
2H
2H08
08
1H
1H09
09
2H
2H0
099
11H
H110
0
22H
H110
0
11H
H11
1
22H
H11
1
The RBNZ has recently announced proposed
new asset class treatment for capital adequacy
for residential property investment loans
which are expected to come into effect on 1
October. The effect of this is that the banks
would
be expected to hold further capital for
Non-household
Non-household
residential property investment loans.
11HH
1122
50
50
The major
banks have seen an increase
in their average
total capital ratio
00
which has increased from 12.4 per cent
in 2H14 to 12.6 per cent in 1H15. The
banks continue to be well capitalised
Household
Household
and comfortably ahead of regulatory
requirements.
New Zealand’s average return on equity has
slightly increased from 16.4 per cent in 2H14
to 16.6 per cent in 1H15. This is driven by the
increased profit during the period and is in line
with 1H14.
Figure 13: Average capital ratios of the New Zealand major banks
14%
14%
13%
13%
12%
12%
11%
11%
11HH1
155
22HH1
144
11HH1
144
22HH
1133
11HH
1133
22HH
1122
11HH
1122
22H
H11
1
11H
H11
1
22H
H110
0
1H
1H10
10
2H
2H09
09
1H
1H09
09
2H
2H08
08
10%
10%
Average total
total capital
capital ratio
ratio
Average
Figure 14: Return on equity of the New Zealand major banks
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
1H
1H
1515
22HH1
144
1H
1H
1414
22HH
1313
1H
1H
1313
22HH
1212
1H
1H
1212
22H
H1
11
1H
1H1
11
22H
H101
0
1H
1H1
010
2H
2H0
099
1H
1H08
08
2H
2H08
08
1H
1H09
09
-15%
-15%
Return on
on equity
equity
Return
Can New Zealand’s banks sustain strong performance and good lending growth?
17
Get in touch
Sam Shuttleworth
Partner
Banking & Capital Markets Sector leader
T: +64 9 355 8119
M:+64 21 976 949
E: sam.shuttleworth@nz.pwc.com
Karl Deutschle
Partner
T: +64 9 355 8067
M:+64 21 352 383
E: karl.p.deutschle@nz.pwc.com
Wayne Leung
Senior Manager
T: +64 9 355 8743
M:+64 21 820 298
E: wayne.y.leung@nz.pwc.com
18 PwC
pwc.co.nz
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