Business Editor-at-Large Liam Dann talks to Pie Funds CIO and Founder Mike Taylor about the other factors stopping high interest rates from crashing the economy.
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ASB is continuing to report record profits, but the bank is preparing for high interest rates to really take their toll on borrowers in coming years.
ASB’s net profit after tax rose by 6 per cent to $1.56 billion in the year to June.
Almost half of the bank’s homeloan customers are yet to roll over onto interest rates above 6 per cent, the bank’s chief executive Vittoria Shortt told the Herald.
She expected this portion to rise to 80 per cent in a year’s time.
By way of context, ASB is currently advertising mortgage rates of between 6.29 and 8.64 per cent for borrowers with equity of at least 20 per cent.
“We have a real lag in the transmission of monetary policy in New Zealand,” Shortt said, highlighting the fact it takes a couple of years for the effects of official cash rate (OCR) changes to be felt across the economy.
The Reserve Bank has hiked the OCR at pace since October 2021 to 5.5 per cent.
Accordingly, the average interest rate mortgage holders paid banks across the country increased from 2.84 per cent in October 2021 to 5.07 per cent in June.
For someone with a $500,000, 30-year mortgage, that jump would’ve increased their repayments by $148 to $624 per week.
Should their interest rate rise to 7.25 per cent, their repayments would jump to $787 per week.
While ASB’s loan impairment expense only rose by $23 million in the year to June, Shortt said the lift in arrears was likely to continue.
“What we learnt through the [2008] Global Financial Crisis is ... that there is quite a long time lag until you actually see real challenges emerge,” she said.
Shortt said the change in sentiment was visible throughout the financial year, as more of ASB’s business customers downgraded their performances.
“That is not unexpected at all when you’re seeing a slowing economy, higher inflation, and higher interest rates. But what we have seen is that the rate of those downgrades is double in the second half [of the year] than it was in the first half,” she said.
ASB has made provisions for $600m of bad debts across its business.
Shortt said this reflected the fact the bank was “extremely well provisioned for what will come”.
Coming back to mortgage holders, she defended the extent to which ASB had lifted interest rates.
The bank made headlines last month for being the first of the country’s major banks to lift mortgage rates, despite the OCR being on hold for the time being.
A spokesperson explained that the money ASB lends comes from a variety of sources, including financial institutions that lend the bank money at wholesale interest rates.
“Over the past two years, wholesale interest rates have increased significantly and we have not increased our fixed home loan rates in line with these increases,” the spokesperson told the Herald.
Shortt made a similar point, noting wholesale rates had been quite volatile.
ASB chief executive Vittoria Shortt says it takes time for interest rate rises to impact the economy. Photo / Supplied
She disagreed with the criticism that ASB had used the rising interest rate environment to increase mortgage rates more than it needed to, arguing it had increased its deposit rates by more than it had increased its mortgage rates.
“All of that put together in a highly competitive home loan market has meant that home loan margins have really been impacted.”
Nonetheless, in the year to June, ASB increased its net interest margin by 22 basis points to 2.44 per cent.
The net interest margin is the ratio of net interest income to average interest-bearing assets.
ASB’s net interest margin of 2.44 per cent is on par with the country’s other big banks.
The banking sector’s net interest margin reached an eight-year high of 2.37 per cent in the December quarter, before falling back a little in the March quarter to 2.35 per cent.
ASB said it is “actively engaged” with the Commerce Commission as it does a study of competition in the banking sector.
“It’s important to us that New Zealanders have confidence in our banking system, and the study is an opportunity to provide this,” Shortt said.
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.
