RBNZ pays 5.5 per cent interest on the $10 billion BNZ has in its settlement account at the central bank. Photo / Alex Burton
RBNZ pays 5.5 per cent interest on the $10 billion BNZ has in its settlement account at the central bank. Photo / Alex Burton
BNZ chief executive Dan Huggins says the bank’s record profit is largely a product of rapidly rising interest rates.
BNZ’s net profit after tax rose by 7 per cent to $1.5 billion in the year to September.
The jump came as its net interest income rose by 16 per cent,reflecting the fact the bank generated a lot of revenue from its interest-bearing assets (such as loans) relative to what it paid on its interest-bearing liabilities (i.e. deposits).
BNZ’s net interest margin jumped 25 basis points in the year to September to 2.4 per cent – a high ratio by historical industry standards.
Speaking to the Herald, Huggins put this rise in profitability down to three factors:
Elaborating on the third point, Huggins explained that pre-Covid, 56 per cent of deposits were in term deposits.
When Covid came along, and interest rates plunged, this portion got as low as 34 per cent, as people didn’t see much point in having their savings tied up in term deposits paying hardly any interest.
When interest rates started rising, savers waited for rates to move higher before shifting their cash.
In September last year, 37 per cent of deposits made at BNZ were in term deposits. By September this year, the portion rose to 44 per cent.
Huggins said BNZ had increased its term deposit rates proportionately more than it had hiked its mortgage rates from when they were at rock bottom. It had just taken savers a while to capitalise on the changing environment.
He didn’t accept the assertion that BNZ’s mortgage rate hikes were unjustifiable, particularly in relation to the bank’s funding costs.
Huggins said the main reason BNZ reported such a wide net interest margin was the first factor listed above – that it received higher rates of interest on its cash and equity.
For example, BNZ is receiving interest at the official cash rate (OCR) – which has risen to 5.5 per cent – on the $10b of cash it has in its settlement account at the Reserve Bank (RBNZ).
The balances of banks’ settlement accounts at the RBNZ ballooned after it created money in 2020 and 2021 to buy government bonds from banks. The RBNZ did this to put downward pressure on interest rates and to ensure there was a buyer of last resort for all the debt the Government was issuing to pay for the Covid response.
Pre-Covid, banks collectively had $7b in their settlement accounts at the RBNZ. This balance peaked at $55b in December 2022, before dropping to $48b in September 2023.
An OCR of 5.5 per cent would see the RBNZ pay banks $2.6b of interest on $48b over a year.
While the European Central Bank recently decided to pay banks less interest on some of their settlement balances, the RBNZ fears changing its system could affect the transmission of monetary policy, hampering its inflation fight.
So in the meantime, it is paying BNZ 5.5 per cent interest on the $10b it has in its settlement account.
BNZ chief executive Dan Huggins attributes the bank's high net interest margin to rapidly rising interest rates. Photo / Supplied by BNZ
High interest rates aren’t all good news for BNZ.
Its results show a deterioration in the bank’s performance in the second half of the September year, as the economy slowed.
BNZ’s net interest income fell by 2 per cent between the first half and second half of the year, while its net profit after tax fell by 13 per cent.
“Inflation, while softening, remains high, and as the OCR has risen, businesses and households have taken a more cautious approach to borrowing,” Huggins said, describing the September year as a “game of two halves”.
Nonetheless, he said borrowers were generally coping with higher interest rates.
Only 255 of BNZ’s 122,000 home loan customers were more than 90 days in arrears.
The RBNZ last week cautioned the pain might be greater than what banks’ mortgage arrears figures suggest, as stressed borrowers tend to prioritise paying their mortgages ahead of other types of debt.
It referenced Centrix data that showed people with mortgages were more behind paying off other types of debt than people without mortgages.
But Huggins said only 0.2 per cent of BNZ’s personal loan book was in arrears.
While the bank’s credit impairment costs nearly doubled throughout the year to $172 million, the rise came from a low starting point.
Huggins acknowledged the economy was in a “difficult period of adjustment”, but he was confident in BNZ’s “high-quality” loan book.
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.
