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Banks settled tax case at 80% of provisioning: BNZ

Wednesday 27th October 2010

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Bank of New Zealand profit figures released today show the bank paid $494 million in total to settle its dispute with the Inland Revenue over structured finance deals.

That represented 80% of the total $661 million the bank had earlier included as provisioning against a loss in the landmark case, which settled after years of litigation on Christmas Eve last year for $2.2 billion in total from five banks – the largest such settlement in New Zealand tax history.

A BNZ spokesman confirmed that “all the banks settled at 80% of their initial provisions”, lending credence to tax experts’ view that the IRD may have grabbed a settlement offer rather than continue to fight the banks, despite winning two key High Court judgments against BNZ and Westpac last year.

Other foreign-owned banks that were also contesting the IRD’s tax avoidance findings were ASB, ANZ, and what was then the National Bank. Rabobank was also involved in the challenges, but did not settle at the time.

Releasing its full year earnings today, BNZ Banking Group – including the bank’s wholesale and international operations – bounced back from a $181 million reported loss in the year to Sept. 30 2009 to report a $602 million tax-paid profit in the 12 months to Sept. 30 this year.

The major difference was the $661 million provisioning for the tax settlement in the year before last, and a writeback of $167 million in the current year, reflecting the final outcome of the IRD settlement.

In separately presented figures on its New Zealand banking operations, BNZ showed it achieved flat post-tax cash earnings in the year to Sept. 30, citing subdued lending demand, new liquidity requirements and intense competition for retail deposits for continuing to squeeze margins.

After-tax cash earnings at $524 million compared with $517 million in the previous year, with net operating income of $1.675 billion up 2.1% on the previous year, while operating expenses of $732 million were 1.2% higher, partly reflecting a $23 million hit from abolishing cheque honour and dishonour fees.

While the bank’s 2.16% net interest margin was up 10 basis points on the previous year, “this remains well below the levels prior to the global financial crisis,” said chief executive Andrew Thorburn.

“The recovery of New Zealand’s economy has been slower than anticipated as it has undergone significant rebalancing in the last year,” he said. “Deleveraging by businesses has also reduced the demand for credit as businesses delay investment decisions.  Overall lending volume growth has been modest.”

Capital ratios were “well above regulatory minimums” at 8.85% tier one capital and 11.81% for total capital.

“While supporting the new bank liquidity policy, these new requirements have added costs to the business and put pressure on domestic funding, with intense competition for retail deposits,” said Thorburn.

Deposits from both retail and business customers of $2.5 billion increased BNZ’s deposit market share to 17.6% at Sept. 2010, up from 17% the previous year, and total retail deposits at balance date were 9.7% higher than at $28.3 billion than a year earlier.

On a cash earnings basis, the New Zealand operations earnings performance was unchanged between the two years at 0.91% on average assets, while gross loans and acceptances at $54.9 billion, was up a bare 2% on the previous year.

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