Westpac NZ seeks more agriculture market share despite dairy downturn

Monday 2nd May 2016

Westpac New Zealand says it wants to lift its market share of agricultural lending over time to 20 percent from the current 12.6 percent.

The Australian-owned bank today reported a steady performance in its New Zealand unit with cash earnings of $445 million for the six months ending Mar. 31, up 2 percent on a year ago.

Overall lending rose 8 percent with a 9 percent lift in business lending to $26.6 billion. Its agricultural portfolio totals $8.1 billion, up from $7.3 billion a year ago with dairy accounting for more than two-thirds of that. Its market share in agricultural lending rose from 12.3 percent in the previous half to 12.6 percent, which chief financial officer Jason Clifton said went mainly to existing rather than new dairy operations.

In an interview with BusinessDesk, chief executive David McLean said he's often asked why the bank wants to lend more on agriculture at a time when the dairy sector is suffering from low global prices, but he said the bank was still underweight in that area and wanted to grow slowly over time. ANZ is the biggest agricultural lender, followed by the BNZ, with Westpac sitting in fifth place.

“There’s a truism in banking that the best time to write loans is at the lower end of the cycle because when you’re writing them at the top end of the cycle the conditions can mask the underlying performance of the business,” he said.

The percentage of the agricultural portfolio graded as 'stressed' rose to 7.81 percent from 3.92 percent last September, although impaired agricultural loans decreased slightly to 0.32 percent.

McLean said he expects losses and impairments to “tick up a bit” in the second half and a third season of low payouts means inevitably some farmers' businesses will not survive.

“But New Zealand farmers are very resilient and have a great capacity to adjust their cost of doing business down,” he said.

Overall impairments for the half were a low $9 million compared to $31 million a year ago.

Westpac was also underweight compared to its peers in mortgage lending growth, which rose 6.3 percent during the first half to $43.4 billion, compared to 8 percent of the overall market.

McLean said the bank was prepared to be cautious on the housing market given the economic outlook. “If a segment of the market is over-heated we are cautious on that”.

He’s picking a two-speed economy to emerge in the second half of the financial year, with the dairy downturn placing a significant drag on export earnings and weighing on industries and communities that service the sector. At the same time, record migration and tourism along with a large pipeline of construction work and historically low interest rates are boosting housing markets in most regions, he said.

Intense competition for new lending and a shift to lower spread fixed mortgages has tightened margins, the bank said. Net interest margins fell 8 basis points during the first half to 2.15 percentage points, driven by increased competition, though Clifton said offshore funding costs have started to flatten in the past six to eight weeks.

Operating expenses also increased $33 million during the half, mainly due to a brand relaunch featuring former All Blacks captain Richie McCaw.

Westpac also has the largest number of smart ATMs among the banks – some 160, with more being rolled out in the second half of the year. Deposits to smart ATMs, which also give change, has risen to 39 percent of total deposits. That's up from 34 percent in the previous half. Although the bank hasn’t yet decided when it will roll out the ATMs' extra functionality, they have barcode scanners that can allow direct bill payment, fingerprint recognition rather than numeric logins, and the potential for video conferencing allowing customers to interact with bank staff face to face if they need to.

Westpac’s group first-half profit rose 3 percent to A$3.7 billion following a hefty increase in capital to meet regulatory demands. Impairment charges rose due to exposure to four large entities which added A$252 million to provisions.

An interim fully franked dividend of 94 cents Australian per ordinary share was declared by the board, an increase of 1 percent on the previous year. It will be paid on July 4.

The ANZ is due to report its half year results tomorrow while the BNZ will report on Thursday.

BusinessDesk.co.nz

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