Bank eyes record profit but challenges ahead
ASB Bank is on track to return another record full-year profit, but its margins may come under pressure again as interest rates rise.
The Australian-owned bank reported a $416 million net profit for the six months to December 31, up 14 per cent from the same period in 2012.
The interim result was achieved through solid lending growth, higher margins and falling bad debts, putting the lender in line to eclipse last year's final profit of $705m.
Chief executive Barbara Chapman said improving economic conditions, the low interest-rate environment and a robust housing market had all helped reduce bad debts.
Also, impairment losses on loans fell another 25 per cent to $21m, but left little room for further improvement.
ASB's net interest margin (the difference between the cost of its borrowing and the rates it lends at) also rose from 2.22 per cent to 2.35 per cent, year-on-year.
Chapman said the bank was earning more from its deposit book after intense competition for deposits had eased off.
Reserve Bank data suggests interest margins squeeze lower during periods of interest rate hikes, dropping below 2 per cent during the last tightening cycle in 2008.
Two percentage points worth of rises are expected by 2016, but Chapman said it was difficult to predict how the changes would filter through.
Massey University banking expert David Tripe said ASB's funding costs would rise over the next six months, and the extent to which official rate hikes were passed on to depositors and borrowers would depend on competition, but it was too early to say whether Reserve Bank speed limits on low-equity loans would affect ASB's results.
Other potential headwinds include a lawsuit over allegedly unfair bank fees.
ASB had solid 7 per cent increase in lending from December 2012, with total operating income boosted 10 per cent to $984m.
That was partly offset by expenses climbing 8 per cent, which the bank attributed to its move to the new Wynyard Quarter headquarters in Auckland, as well as ongoing investment in technology.
In Australia, ASB's parent company, CBA, has also delivered a record-breaking half-year cash profit of A$4.27b (NZ$4.6b).
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