FIPS Quarterly Nov09

FIPS Quarterly
Financial Institutions Performance Survey

November 2009 FINANCIAL SERVICES
THIRD QUARTER
A difficult quarter
Results from the Major Banks to 30 June 2009
Overview for the quarter

KPMG has continued to monitor the results of the major retail banks in New
Zealand, with a particular emphasis on the big 5 banks (ANZ National, ASB Bank,
BNZ, Kiwibank, and Westpac).
For consistency, we have used the results of the New Zealand Banking Group’s
to ensure consistency across the entities (as far as possible).
Entity disclosed Includes
ANZ Banking Group – ANZ Banking Group – New Zealand Branch
New Zealand Branch ANZ National Bank Limited Group
CBA – New Zealand Branch CBA Banking Group –
New Zealand Branch
ASB Bank Limited Group
Westpac Banking Group – Westpac Banking Group –
New Zealand Branch New Zealand Branch
Westpac New Zealand Limited
Bank of New Zealand Group Bank of New Zealand
Kiwibank Limited Kiwibank Limited
Results for the quarter

During the quarter ended 30 June 2009 the major banks have posted a loss after
tax of $348 million, driven by BNZ recognising the loss of the High Court case
taken by the IRD into certain structured finance transactions. If this was removed
from the quarter, the profit after tax would have been $313 million, still lower
than the $483 million of the prior quarter or the $722 million in the June 2008
period.
There are a number of drivers for the reduction in headline profitability but
when we look at the normalised profit we see that underlying profit was $1,042
million for the quarter (ie backing out tax, credit impairment and abnormals),
compared to $1,409 million in the prior quarter and $1,139 million in the prior
year. This represents a 26% and 9% reduction from prior quarter and prior year
respectively.
The key events over the last quarter have been the continued significant increase
in loan impairment charges and the tax conduit cases. However, it should be
noted that there has been a further ‘hit’ to profitability for the quarter from
revaluation losses on financial instruments.
©2009 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Net interest margins have improved in the hearing), BNZ decided to record Funding and liquidity
slightly from the March quarter – the full amount of tax. It appears that the worst of the funding
improving to an average 2.07%, BNZ’s approach was not followed and liquidity issues of the last year
although this reflects some noise in by the other major banks as at 30 are past, with the major New Zealand
interest margins from the impacts of June 2009 (Kiwibank excepted who banks finding the US commercial
prepayments of fixed rate mortgages in is not subject to the conduit cases). paper markets easing back to more
prior quarters, revaluations of hedging However in early October 2009 the traditional levels, and reducing the
and swaps and other associated Westpac judgement was issued by need to utilise the Governments
factors. Significantly the cost of funds Justice Harrison who also ruled against wholesale deposit guarantee. As
(interest expense over interest bearing Westpac. While the finer details of can be seen below issuance peaked
liabilities) has increased faster than the this judgement are still being worked in July 2009 and has in August and
associated lending income reflecting through it appears likely that Westpac September 2009 fallen away as the
the tough competition in the market for will record an approximately $960 Banks have sourced funding offshore
deposits. million provision for this case and it at significantly reduced rates to those
Costs have been well managed and would appear likely that ASB and ANZ being experienced earlier in the year.
have tracked at a very flat level. National will follow suit with exposures
Impaired asset expense increased stated as $282 million and $492 million
although only marginally over the respectively.
March quarter - $609 million vs $582 New bank registration
million but this is significantly more During the quarter, Baroda (New
than the prior year ($153 million Zealand) has been listed as a new
and $130 million respectively). This bank in New Zealand, taking the
continues to reflect both losses total number of registered banks to
in mortgages but also commercial 19. Baroda is a subsidiary of Bank
business failures. However these of Baroda (India) and will operate in Regulatory developments
losses are also driving significant New Zealand under the name Bank The Government has acted early to
increases in the level of collective of Baroda (New Zealand). Bank of give clarity on the future of the retail
provision being held, with CP Baroda has stated that it will offer a deposit guarantee. Concerns had been
increasing $113 million in the June wide range of banking services. Bank expressed in a number of forums that
quarter (and a further $185 million in of Baroda is the third largest public unless an extension had been provided
the March quarter). sector bank in India and operates in 25 to the 12 October 2010 maturity date a
So all told this has been a very tough countries. number of entities, particularly finance
quarter for the banking industry with Economy and OCR companies, may have found the
total asset contraction, increasing coming months a significant struggle.
In the latest RBNZ monetary policy
capital requirements, reducing As such a revised version of the
announcement the central bank kept
profitability and soaring bad debts. governments retail deposit guarantee
the OCR at 2.5% and continued
Tax conduit cases scheme has been pushed through
saying that the OCR will be kept at its
Parliament and will allow for deposits
Obviously the major factor affecting current rate or lower until late 2010.
to be guaranteed through to the end
Net Profit after Tax for the quarter However, in contrast the Reserve Bank
of 2011, when it is hoped that the
was the result of the New Zealand of Australia has recently increased its
guarantees can end without any impact
Structured Finance Transactions case cash rate by 25 basis points to 3.25%.
on financial markets. A significant
(the so-called “Conduit Tax case”), with While there are signs of a recovery
feature of the updated deposit
a judgement being reached by Justice in the New Zealand economy, there
guarantee scheme is the requirement
Wild on 15 July 2009 against BNZ remains significant risks to a full
for all entities to reapply for the
on the majority of points of law. As a recovery ranging from the high New
guarantee, reductions in the level of
result BNZ recorded additional income Zealand dollar, the level of Fonterra
coverage ($500,000 if with a bank or
tax expense of $661 million, being milk payout, and the property market.
$250,000 with a finance company) and
$416 million of tax plus $245 million of Therefore there is keen interest in
the new requirements for entities to
use of money interest. the economic data coming out and
hold a credit rating equivalent to BB
BNZ have indicated publicly that they its implications on the RBNZ’s stated
or better. Pricing has been introduced
intend to appeal against the judgement intention to hold the OCR at 2.5% for
which will require entities to pay fees
to the Court of Appeal but pending this the foreseeable future.
based on their credit grading rising
appeal (which could be several years
from 15 basis points for AA rated to bloodshed which was experienced
150 basis points for BB rated. This in the UK banking system with the
reflects general sentiment in the Government having to step in and
industry that the Government (via the provide a £37 billion bailout to long
Treasury) was taking on a substantial established banks such as Royal Bank
liability which needed to be priced in. of Scotland, Lloyds TSB and Halifax
A further regulatory development Bank of Scotland, not to mention the
has been the fact that the RBNZ has Northern Rock failure.
been conducting a Section 95 of the In a New Zealand context the RBNZ
Reserve Bank Act review of Westpac has been working with the Banks to
with three stated objectives. The introduce a revised Prudential Liquidity
review encompasses a wide range of Policy that will impose new liquidity
objectives including a review of the measures on the New Zealand Banks
structure of the operating model of the and which it is speculated is likely to
Overseas Banking Group’s business have a flow on cost to consumers.
in New Zealand; further the review Whether the RBNZ is likely to follow
will cover a review of governance and the path of the UK FSA is yet to be
compliance with the conditions of seen.
registration. The results of this review Finally in New Zealand, the long
are not yet known, but point to a more running case between the Commerce
hands on approach from the Reserve Commission and Visa, MasterCard and
Bank. the credit card issuing banks in New
While the worst of the impacts from Zealand appears to have reached a
the Global Credit Crunch appear to settlement with the banks. While not
have largely past, ongoing issues providing any admission of liability, this
continue to arise and provide fuel to settlement will bring to a close the
the widespread “forest fire” which has issues and allow the banks to move
been raging in the international banking forward under an amended set of
sector. The latest such event being rules.
the news that the Latvian banking
system is on the edge of collapse
as it has not met the spending cuts
required to secure their next tranche
of bail-out funds from the EU, Sweden
and the International Monetary Fund.
Should this occur, it could potentially
spook the markets which have in
recent months begun to operate more
normally.
While the full effect of the credit
crunch is coming to an end, regulators
have been using this period to consider
the implications of the last two years
and what the future of bank regulation
might hold. The UK Financial Services
Authority (FSA) has released proposed
liquidity requirements which could cost
British banks as much £9.2 billion per
year, as the banks will be required to
hold more liquid assets and which will
constrain the types of assets the banks
can hold. While these costs are likely
to be passed on to consumers, this is
seen as preferable to the widespread
Interest margins
Major banks : Interest margin

%
n ANZ National Bank n ASB Bank n Bank of New Zealand n Kiwibank n Westpac New Zealand Division
30-06-09 31-03-09 Mvmt Mvmt 30-06-08 Mvmt Mvmt

Quarter Quarter BP % Quarter BP %
ended ended ended
ANZ National 2.11 2.10 0.01 0.4% 2.20 -0.10 -4.7%
ASB Bank 1.73 1.50 0.23 15.6% 1.82 -0.32 -17.5%
Bank of New Zealand 2.14 2.04 0.11 5.3% 2.31 -0.28 -12.0%
Kiwibank 1.81 1.63 0.19 11.5% 1.73 -0.10 -6.0%
Westpac Banking Corporation 2.31 2.25 0.06 2.7% 2.26 - 0.01 -0.4%
Average 2.07 1.99 0.09 4.4% 2.15 -0.16 -7.6%
Comments
The rolling year has seen volatility in interest margins, with an overall decrease in margins for all banks. Most New Zealand
banks are not able to obtain enough local retail deposits to fund New Zealand households and businesses. Banks have
been forced to source wholesale funds from overseas using the wholesale guarantee and an increase in wholesale margins
from 20-30 basis points above OCR to 100-150 basis points over the OCR since the onset of the global financial crisis for
these funds is pressuring interest margins and the banks’ results. This increase in wholesale interest margins has resulted
in increased competition for local deposits.
The June 2009 interest margin result appears to be broadly consistent with the quarters surrounding it although is the first
quarter in a few where the overall trend wasn’t a reduction. We believe that this is due to unwinding or breaking of swaps
that had been used to hedge fixed rate loans that were broken earlier in the year. The June quarter saw a reduction in the
level of loans being broken, and accordingly there has not been the need to break as many swaps in the current quarter.
Loans and advances
Major banks : Quarterly increase in gross loans and advances

% Kiwibank

ended ended ended
ANZ National -0.65 -0.72 0.06 -9.1% 2.95 -3.60 -122.1%
ASB Bank 1.64 0.25 1.39 563.0% 8.41 -6.76 -80.5%
Bank of New Zealand 1.40 1.85 -0.45 -24.2% 3.93 -2.53 -64.4%
Kiwibank 10.50 10.08 0.41 4.1% 9.28 1.22 13.2%
Westpac Banking Corporation -1.03 -0.43 -0.60 138.6% 2.45 -3.48 -142.1%
Average 0.44 0.32 0.13 39.6% 4.18 -3.74 -89.4%
Comments
Kiwibank (secondary axis) continued to achieve significant growth in loans and advances, up 10.5% in the June 09 quarter
on the back of 10.1% and 15.4% growth for the March 09 and December 08 quarters respectively. The Kiwibank growth
reflects a continued ‘market share grab’ (which started in the final quarter of 2008), when Kiwibank saw the other major
banks pulling back sharply from new lending, off the back of funding concerns for the other major banks with a greater
reliance on wholesale funding.
Growth in lending assets for the other major banks was either flat or negative in the June quarter, mirroring the March
quarter with movements between -1.03% and 1.64%, due to the lack of opportunities to increase lending assets in the
current market. Overall the loans and advances are practically flat for the quarter.
Growth has been impacted by decreases in rural property prices, particularly in the dairy sector, with a significant drop in
the payout from Fonterra impacting property prices, despite the recently revised payout increasing by 55c to $5.10. This
drop in dairy prices has also resulted in credit pressures.
Non Interest income
Major banks : Non interest income vs. average total assets

%
Comments
With reduced volatility in markets as the world settles down after the Global Financial Crisis there have been limited
opportunities for high sales volumes at an institutional and treasury level. A further effect of settled markets is the reduced
proprietary trading opportunities for our largest banks.
Going forward we would expect to see reduced non interest income from the majors as a round of announcements
about reduced honour and dishonour fees on overdrawn accounts have been made. This has an estimated annual cost for
Westpac of $50 million per annum and would be similar across each of the banks.
Also impacting non-interest income is a reduction in the gains on financial instruments since the respective balance dates -
big gains were recorded at these balance dates and these are now receding, reducing the income for each quarter.
Operating expenses
Major banks : Operating expenses vs. operating income

%

ended ended ended
ANZ National 52.21 41.99 10.22 24.3% 49.40 2.81 5.7%
ASB Bank 41.21 34.68 6.53 18.8% 47.78 -6.58 -13.8%
Bank of New Zealand 56.37 40.45 15.92 39.4% 39.23 17.14 43.7%
Kiwibank 62.96 66.14 -3.18 -4.8% 75.36 -12.39 -16.4%
Westpac Banking Corporation 38.18 35.86 2.32 6.5% 37.82 0.36 1.0%
Average 47.74 39.75 7.99 20.1% 44.94 2.81 6.2%
Comments
The increase in the cost-income ratio during the June 2009 quarter has been driven by prior quarter gains on financial
instruments impacting the income side of the ratio. Income on a quarter on quarter basis reduced from $2,339 million in
the March quarter to $1,994 million for the June quarter – representing a 15% reduction over the quarter. The March quarter
had much higher levels of break fee income but also treasury and markets income was higher in the March quarters.
Expenses for the quarter were $951 million, increased by $22 million for the major banks, which is a minimal increase.
Asset quality
Major banks : Past due and gross impaired assets vs gross loans and advances
% %
31-DEC
31-DEC
31-DEC
31-DEC
31-DEC
31-DEC
31-DEC
31-DEC
31-DEC
31-DEC
Past due assets/Gross loans
ended ended ended
ANZ National 0.54 0.55 -0.01 -2.1% 0.26 0.27 103.6%
ASB Bank 0.70 0.73 -0.03 -4.7% 0.29 0.41 143.5%
Bank of New Zealand 0.35 0.28 0.07 26.5% 0.31 0.05 15.0%
Kiwibank 0.27 0.32 -0.05 -16.7% 0.16 0.11 67.8%
Westpac Banking Corporation 0.23 0.68 -0.46 -67.0% 0.49 -0.27 -54.2%
Average 0.46 0.55 -0.09 -16.8% 0.32 0.14 42.0%
Gross impaired assets/Gross loans

ended ended ended
ANZ National 0.92 0.61 0.31 50.0% 0.22 0.70 314.8%
ASB Bank 0.66 0.55 0.10 18.6% 0.06 0.60 1000.0%
Bank of New Zealand 0.72 0.77 -0.05 -6.3% 0.18 0.55 310.5%
Kiwibank 0.22 0.12 0.11 91.1% 0.07 0.15 211.8%
Westpac Banking Corporation 1.51 1.26 0.25 20.0% 0.36 1.14 315.0%
Average 0.93 0.75 0.17 23.0% 0.21 0.72 345.5%
Comments
Total impaired loans have grown rapidly during 2009, although the past due assets seems to have pulled back from the
previous March high. Consistent with prior periods, impaired loans have on the whole increased, while past due loans
have held relatively stable, (or reduced in some circumstances), suggesting the banks are applying a quick process on
non-performing accounts pushing them either back into performing or into impaired. Westpac experienced a significant
movement of non-performing loans from Past Due Assets to Impaired Assets during the quarter and Westpac’s level of
impaired assets remains at a noticeably higher level than the rest of the major banks.
The RBNZ has identified that bank models are not correctly managing the value fluctuations in rural property prices after the
steep and sudden decline of dairy property prices in terms of bank capital adequacy models. This and other factors have
led the RBNZ to change the rules around rural loans and will require further capital to be held for rural loans.
Impaired asset expense
Major banks : Impaired asset expense vs. average gross loans and advances
%

ended ended ended
ANZ National 0.98 0.77 0.21 26.6% 0.31 0.67 214.8%
ASB Bank 0.69 0.61 0.08 12.7% 0.18 0.50 275.8%
Bank of New Zealand 0.31 0.47 -0.16 -33.9% 0.16 0.15 96.6%
Kiwibank 0.20 0.21 -0.01 -5.8% 0.21 -0.01 -7.0%
Westpac Banking Corporation 1.62 1.70 -0.08 -4.7% 0.25 1.37 546.1%
Average 0.90 0.86 0.04 4.3% 0.24 0.65 271.2%
Comments
As shown for almost all measures, impaired asset expense and loan write-offs increased in the June 2009 quarter. Total
impaired asset expense (as a percentage of gross loans) increased from 0.86% to 0.90% in the June 2009 quarter. While
there is a continuing increase in the impaired asset expense, the growth has slowed considerably, and with ‘green shoots’
now showing in the economy, we would expect to see the impaired asset expense growth slowing into the December
quarter. The question many people seem to be asking is whether a number of corporates are merely holding on for the
Christmas period and whether poor Christmas season sales might see them placed in receivership in the new year.
Kiwibank’s impaired asset expense (in relation to gross loans and advances) fell in the June 2009 quarter, continuing the
trend from the prior quarter, however this is a result of continued strong asset growth (11%) compared with relatively stable
loan write offs for the period
Westpac has experienced another quarter of increased impairment expense. Although down on the prior quarter, as a
percentage of average loans and advances it is higher than any other major bank. ANZ National has seen a significant
increase in their impaired asset expense although a significant portion of this related to increases in the collective provision.
On the other side of the ledger, Bank of New Zealand has managed to significant reduce their impaired asset expense
over the quarter.
kpmg.co.nz
To discuss FIPS Quarterly in more detail,

please contact:
Auckland Wellington
Matt Prichard Godfrey Boyce
Partner Head of Financial Services
tel +64 (9) 367 5846 tel +64 (4) 816 4514
matthewprichard@kpmg.co.nz gboyce@kpmg.co.nz
John Kensington Malcolm Bruce
Partner Partner
tel +64 (9) 367 5866 tel +64 (4) 816 4526
jkensington@kpmg.co.nz malcolmbruce@kpmg.co.nz
The information provided herein is of a general nature and is not intended to address the circumstances
of any individual or entity. Although we endeavour to provide accurate and timely information, there can
be no guarantee that such information is accurate as of the date it is received nor that it will continue to
be accurate in the future. No one should act on such information without appropriate professional advice
after a thorough examination of the particular situation.
©2009 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. The
KPMG logo and names are trademarks of KPMG. KPMGW-8040

FIPS Quarterly Nov09

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FIPS Quarterly Nov09

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FIPS Quarterly

Financial Institutions Performance Survey

Overview for the quarter

Results for the quarter

Major banks : Interest margin

30-06-09 31-03-09 Mvmt Mvmt 30-06-08 Mvmt Mvmt

Major banks : Quarterly increase in gross loans and advances

30-06-09 30-03-09 Mvmt Mvmt 30-06-08 Mvmt Mvmt

Major banks : Non interest income vs. average total assets

Major banks : Operating expenses vs. operating income

30-06-09 30-03-09 Mvmt Mvmt 30-06-08 Mvmt Mvmt

Gross impaired assets/Gross loans

30-06-09 30-03-09 Mvmt Mvmt 30-06-08 Mvmt Mvmt

To discuss FIPS Quarterly in more detail,

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