ASB posts record annual profit

Photo / Michael Craig

Bank increases rural provisioning but is positive about long-term future for dairy farmers.

ASB, which reported a record annual profit yesterday, is increasing rural provisioning as a slump in dairy prices puts increasing financial pressure on farmers.

Chief executive Barbara Chapman said that while she remained positive about the long-term outlook for the dairy sector, the bank was keeping a "close eye" on the industry.

Fonterra last week slashed its farm gate milk price from $5.25 per kg of milk solids to $3.85 per kg, which is well below break-even for most farmers.

"It is fair to say that it is difficult for those farmers," Chapman said.

"We are staying close to them and we have increased our rural provisions just to reflect the part of the cycle that we're in. We're positive about prospects for the longer-term, but we're just keeping a close eye on what's going on at the moment."

She said ASB had not experienced a lot of bad debt in the rural sector in the roughly 20 years it had been operating in that space.

"And there's been some ups and downs in dairy prices during that period - in fact there's been three big chunks where dairy prices have been low and our bad debt experience is actually relatively light."

Chapman said the bank's full-year result, which included a 7 per cent rise in net profit to a record $859 million, reflected a focus on sustainable growth.

"This was an across-the-board performance with all areas of the business contributing to the result."

Chapman said rising prices in Auckland's property market were driven by "underlying fundamentals" such as migration and interest rates. "We don't have any concerns in that book."

She said ASB's operating income, which rose 5.8 per cent to $2.1 billion, was affected by hedging volatility following a sharp fall in wholesale interest rates.

"Excluding this volatility, underlying growth of 8 per cent was influenced by strong business and rural lending growth of 14 per cent on the previous financial year," Chapman said.

The bank's loan impairment expenses rose 59 per cent on the previous year to $89 million.

ASB said its net interest margin rose to 2.44 per cent from 2.38 per cent, year-on-year, while operating expenses rose 5 per cent to $805 million as a result of "inflationary-related salary increases and continued investment in frontline capability".

Total loans rose 8 per cent to $65.4 billion.

Meanwhile, ASB's parent, Commonwealth Bank of Australia, reported a 5 per cent rise in cash profit to A$9.14 billion ($10.2 billion) in the 12 months to June 30.

The Sydney Morning Herald reported that it was Australia's largest-ever bank profit.

CBA also announced that it would carry out a A$5 billion rights issue aimed at boosting capital in order to meet regulatory requirements.

But despite the bumper profit figure, Australian analysts have expressed concern about a slowdown in the second-half of CBA's financial year, as well as a rise in bad debt expenses.

See more from ASB's results here: