Westpac New Zealand is weighing its options for meeting a likely increase to capital requirements ahead of next month's decision by the Reserve Bank, says its chief executive.
The bank announced a cash profit rise of 3 per cent to $1.042 billion boosted by its one-off gain from the sale of its share in Paymark and a $10 million impairment benefit this morning.
Its core earning for the year to September 30 were down 1 per cent on the prior year to $1.422b while its net profit after tax rose 3 per cent to $964 million.
The New Zealand business was one of the bright spots for its parent Australian bank Westpac Banking Corporation which announced plans for a A$2.5 billion capital raise after it revealed a 15 per cent drop in its cash profit to A$6.849b.
WBC also cut its second half dividend from A94c to A80c. Australian media speculated that up to A$2 billion of the capital raise could be needed to meet increased capital requirements in Australia which kick in from January and that there would be little left in the kitty to help out the New Zealand arm.
But speaking after the result McLean was relaxed about the Reserve Bank of New Zealand's capital proposals which are set to be finalised early next month.
"The key point I would make is we don't know yet."
McLean said the bank had retained earnings and was well-capitalised at the moment. It would also benefit from the lifting of capital restrictions which have been in place for the last 18 months.
In 2017 the Reserve Bank required Westpac to undertake an independent review of its compliance with internal models obligations.
The review found that Westpac was using a number of unapproved models and that it had materially failed to meet requirements around model governance, processes, and documentation.
The regulator imposed a precautionary capital overlay in light of the regulatory breaches, and gave Westpac 18 months to remedy the failures or risk losing its accreditation as an internal models bank.
Deputy Governor Geoff Bascand said that following the remediation process, Westpac was now operating with peer-leading processes, capabilities and risk models in a number of areas and would retain its accreditation.
It will lift a two percentage point capital regulatory overlay from the end of this year.
McLean said when the extra requirement to hold 2pc came off it would put the bank in a better position.
"We have got a range of options. We haven't got to that decision making point yet.
Last week ANZ announced it was only going to pay 20 per cent of its cash earnings in a dividend to its parent compared to the 80 per cent it normally paid out.
McLean said its dividend usually moved around a lot and some years it didn't pay anything to it parent.
"It depends how much cash is built up."
McLean described the result as "balanced" in a very challenging environment with lots of moving parts.
He said it had been focused on improving the experience of customers, while investing more into its technology and compliance areas.
McLean said business conditions had deteriorated in the second half of the reporting period based largely on uncertainty about the outlook into next year.
"Although significant risks exist globally, the local economy remains in reasonable health, our business is fundamentally sound and our balance sheet continues to be well managed."
The bank's net operating income rose 2 per cent to $2.415b but its operating expenses were also up rising 7 per cent to $993m.
Its net interest margin was squeezed down 8 basis points to 2.16 per cent.
Westpac saw a 5 per cent boost to its loan book to $84.2b with growth spread across its mortgage and business lending while deposits rose 4 per cent to $64.5b.
McLean said on the home lending front there had been fewer loans in the second half and tougher competition which had seen the banks competing for a smaller pool of customers.
"The Spring housing season is now under way. There does seem to be signs of life."
McLean said the next few months would give a better idea of where the market was going.
"There is not enough data at the moment."
Outside of the capital proposals McLean said the big challenge was the uncertainty around the low interest rate environment.
"How do we avoid the stagnation that Japan went through over the last 20 years? If the economy needs stimulation what can the Reserve Bank do? What are the unconventional tools that can be used.
"These are the things nobody has got an answer to."
But McLean said low interest rates would continue to put pressure on bank margins.
"It is harder and harder to maintain margins as everything compresses down to zero."
McLean said low interest rates were providing opportunities for first home buyers and others looking to make a move in the property market.
"We've never seen interest rates this low in New Zealand. It helps with housing affordability and business investment, and presents a great opportunity for existing borrowers to pay down debt."
Two-thirds of Westpac NZ customers were ahead in their mortgage repayments by a median average of eight months, or an average of $8,652, at 30 September 2019, he said.
However, low rates had also meant savers, many of whom rely on deposit interest to supplement their retirement income, saw their returns reduced.
Westpac's KiwiSaver scheme also increased its funds under management by 15 per cent year-on-year, from $6.1 billion to $7.0 billion with the average balance up 16 per cent to $17,806.
All the banks are facing pressure over proposals by the Reserve Bank to increase the amount of capital they hold.
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In its submission Westpac warned the proposals could add $6000 a year to the cost of an Auckland mortgage and have a "significant negative impact" on the economy.
The RBNZ's proposals include a near doubling of the minimum common equity banks should hold from 8.5 per cent currently to 16 per cent for the big Australian-owned banks.
The proposed increase is designed to make banks safer and better designed to handle periods of financial stress by holding enough capital to reduce the probability of a financial crisis in New Zealand to a one in 200-year event.
Westpac said it estimated the increase in capital could up the cost to borrowers by adding more than 100 basis points to the interest rate on a home loan - an increase of around $6k to an average home loan in Auckland.
The calculation assumes a 20 per cent deposit on an average Auckland house costing $1,039,917 with the interest rate on a 30-year mortgage rising from 4 per cent to 5 per cent.
That is in contrast to the central bank's forecasts that its proposals would have a minimal impact on borrowers adding somewhere between 20 and 40 basis points to home loan rates.
Westpac said the proposal to require banks to hold 16 per cent in tier one capital was significantly higher than overseas jurisdictions and given banks hold a buffer the practical effect would be an increase to 18 per cent of risk-weighted assets.
That would see Westpac's capital increase by around $4.5 billion and more than $25 billion across the sector, it said. In order to fund growth of 3 per cent over the proposed five year transition period Westpac would need to raise $6.5 billion.
Last week ANZ New Zealand - New Zealand's largest bank - reported a net profit after tax of $1.825 billion down 8 per cent on its record 2018 profit of nearly $2 billion.
It's cash net profit was up 2 per cent to $1.933 billion for the year to September 30 on the back of the sale of its One Path Life insurance business to Cigna and the sale of its 25 per cent stake in Paymark. But excluding those one off sales it was down 4 per cent to $1.5b.
Bank of New Zealand is due to report its result on Thursday.