Bank margins to remain under pressure as mortgage market stays competitive

A moderation in New Zealand property prices is unlikely to ease up the pressure on lenders' margins as banks continue to compete for customers in a country enjoying strong inbound migration, a robust labour market and low interest rates, Bank of New Zealand boss Anthony Healy says.

The local unit of National Australia Bank reported a 3.4% decline in cash earnings to $933 million in the 12 months ended September 30, with a relatively flat performance from its dominant banking unit as net interest margins were squeezed 14 basis points to 2.19%.

BNZ's loan book grew 9% to $74.38 billion while customer deposits were up 10% to $51.48 billion. New Zealand's banks have been competing aggressively for mortgage customers in recent years as record net migrants, solid economic growth, and low interest rates stoke demand for property, which is in short supply in the country's biggest city, Auckland.

Mr Healy anticipates house price inflation will rise more slowly as a result of the Reserve Bank's curbs on low-equity mortgage lending, but he doesn't expect that to dampen competition.

"I don't see a dramatic correction – with everything still happening around the world, New Zealand is an attractive place to live or stay and a dramatic increase in interest rates or unemployment is not on the cards," Mr Healy told BusinessDesk.

That competition for housing meant lenders also have to secure funding, which Mr Healy expects will remain tight and continue to put the squeeze on margins.

Mr Healy said the bank is careful where it pursues credit expansion, targeting "higher segments where we get a good return."

That includes the small business segment, where BNZ boosted its loans 9% in the year and Mr Healy says it's a "very attractive" sector which the lender wants to grow.

Mr Healy was also optimistic about the agricultural sector, saying dairy has weathered last year's downturn and is offering good opportunities while other industries are performing very well.

BNZ's commercial real estate loans outside Auckland showed a deterioration in quality, with the lender's specific provision coverage ratio rising to 45.8% from 26.4% a year earlier, although the ratio of impaired loans shrank to 0.03% from 0.27%. All of that provisioning was outside Auckland, which accounted for about 53% of BNZ's $8.4 billion of loans to the sector.

Mr Healy said apartment lending in Auckland had tightened but BNZ would continue to finance existing customers with good track records and strong pre-sales.

The collapse of the second-tier finance sector almost a decade ago had left a gap in the market, though Mr Healy said that wasn't an area the bank wanted to be a part of.

(BusinessDesk)