ASB’s ability to offset this expense by charging borrowers more was limited, the bank said, due to competition.
Its net interest income fell by 5% over the year, while its net interest margin - a key measure of profitability - dropped by 16 basis points (from a historically elevated level) to 2.23%.
ASB chief executive Vittoria Shortt said the bank’s result reflected the economy’s challenging economic conditions.
The amount of stress felt by ASB customers climbed during the year.
ASB’s loan impairment expense rose by 9% to $70 million.
“This was mainly driven by higher individually assessed provisions in the business portfolio and write-offs in the consumer finance portfolio,” ASB said.
The value of home loans more than 90 days in arrears rose by 27 basis points over the year to 0.61%, while consumer finance more than 90 days in arrears was up 92 basis points to 1.41%.
Speaking to the Herald, Shortt said arrears were about half what they were during the 2008 Global Financial Crisis (GFC).
She noted borrowers had less debt relative to their incomes than during the GFC. ASB also kept the interest rate it tested mortgage applicants at when interest rates plummeted in 2021 relatively high. The lowest ASB’s test rate fell to was 6.45%.
Shortt hoped loan impairments had peaked in this economic cycle, but said there was always a chance it would continue to rise.
She didn’t believe ASB’s resilience was a reflection of it being too risk-averse with its lending, particularly to businesses and the rural sector.
“We fundamentally believe that balance sheet resilience is important for the rural sector,” she said, noting risks around fluctuating commodity prices and changing weather patterns.
“Generally speaking, we believe more debt is not necessarily the right answer. That’s not about riskiness. That’s about helping farmers think about what the right settings are for their business.”
As for businesses, Shortt said more debt wasn’t always the answer.
“When we talk about risk, are we talking about it from a bank’s perspective, or a customer’s perspective?” she said.
“You don’t want a whole bunch of business customers, specifically small business customers, horribly stressed out of their minds because they’ve got so much debt.
“For me, it’s more about responsible settings, resilient settings, because there is more volatility that we all have to deal with.”
Shortt wasn’t convinced ASB would necessarily change its risk appetite or lending practices if the Reserve Bank loosened its bank capital rules.
There are no such plans. The Reserve Bank is strongly opposed to doing so. But the Commerce Commission suggested, in its draft report on its banking market study, the rules could be stymying competition among banks.
Finance Minister Nicola Willis last week told the Herald she wasn’t opposed to forcing the Reserve Bank to loosen the rules, should she be convinced the efficiency gains wouldn’t impede financial stability.
However, Shortt said, “You have to think about: What are the cashflows of that business? And what is the volatility of those cashflows? The capital that you hold is an important consideration… but it’s one consideration.”
Bumper remuneration for CEO
Shortt’s annual remuneration package more than doubled over the year from A$1.94m ($2.07m) to A$4.71m ($5.172m).
The bank explained her base salary hadn’t changed. Rather: “Vittoria’s pay structure has changed three times since she started as ASB CEO, which has resulted in an anomaly this year where she has been paid out deferred incentives for 2019, 2021 and 2022 in one year.
“This includes a significant long-term incentive component which was not included at all last year.”
Jenée Tibshraeny is the Herald’s Wellington business editor based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
