Westpac reports 10% profit growth, partially thanks to popularity of floating interest rates

Westpac New Zealand chief executive Catherine McGrath says Reserve Bank capital rules could increase borrowing costs by 50 basis points. Photo / Mark Tantrum

Westpac New Zealand’s profits are continuing to rise, as it makes more money from existing customers, rather than materially growing its business.

The Australian-owned bank’s New Zealand division reported a net profit of $525 million in the six months to March – a 10% rise from the same period a year earlier.

Its net interest income rose 9%, despite the bank only growing its loan book 2% and its customer deposits 3%.

Accordingly, its net interest margin – the interest income it received from borrowers relative to that which it paid depositors and other funders – rose by 15 basis points to 2.26%.

Speaking to the Herald, Westpac New Zealand chief executive Catherine McGrath said the increase partially reflected the rise in popularity of floating interest rates during the half year, which were higher than fixed rates.

Industry-wide data shows more borrowers opted to put their mortgages on floating or shorter-term rates, likely in anticipation of interest rates falling.

McGrath said the trend was unwinding, as the likely end of this cycle of Official Cash Rate (OCR) cuts was in sight, and borrowers were once again happy to start locking in rates for longer durations.

Westpac also noted it was still receiving high rates of interest from borrowers who locked in higher rates a few years ago.

On the other side of the ledger, McGrath said the bank capitalised on the period of market uncertainty and locked in offshore funding at attractive rates.

Westpac said this was partially offset by the bank needing to offer relatively attractive term deposit rates to compete with other banks.

Savers started opting to put their money in savings accounts rather than term deposits over the period, as falling interest rates made the benefit of locking savings away for fixed terms less appealing than before.

McGrath defended the bank’s high net interest margin. While it was above that of Westpac Group (1.88%), she said it was below that of Westpac Australia’s retail business, which was a fairer comparison.

However, she couldn’t disclose this figure, as it wasn’t included in the interim result.

The Australian-owned banks have for some time been criticised for leaning too heavily on their New Zealand businesses to bolster their groups’ profits.

Parliament’s Finance and Expenditure Committee is wrapping up an inquiry into competition in the banking sector, which may end up seeing the Reserve Bank require banks to hold less capital than is currently planned.

The thinking (which is contested) is that less onerous regulation will enable banks to lend more and at a lower cost, particularly to businesses and farmers.

McGrath welcomed the Reserve Bank’s recent decision to review the rules.

She noted the requirement for banks to bolster their capital over the seven years to 2028 ate into their returns on equity.

Westpac reported a 12.5% return on average tangible equity in the six months to March – an increase from 11.9% in the same period the prior year, but a fall from the returns of the past.

McGrath said banks had to keep offering their investors reasonable returns, despite the pressure of the capital rules, so would pass the cost of the rules on to customers.

If the rules weren’t watered down, she expected them to add 50 basis points to the average interest rate Westpac charged borrowers.

The Reserve Bank maintains there wouldn’t be such a big impact.

It hopes to have its review of its capital rules complete by the end of the year.

Finance Minister Nicola Willis is supportive of the review, fearing the rules might be going too far to try to keep banks safe, at the expense of economic growth.

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.