Mortgage growth offsets bank’s NIM pressures

Superfund-owned bank ME has released its 2019 half-year financial results (HY19), recording above system mortgage growth of 3.6 per cent (2.2 times system) in the six months to 31 December 2018, lifting its portfolio to $25.3 billion.

ME reported that its share of the home loan market rose from 1.46 per cent as at 31 December 2017 to 1.48 per cent.

The lender also revealed that over 90-day mortgage delinquencies underlying its portfolio remained at a “historical low” of 0.63 per cent, with a loss rate of 0.0002 per cent.  

Additionally, the lender reported above system household deposit growth of 23 per cent (4 times system) when compared to the previous corresponding period, rising to $10.7 billion, with its market share of the household deposit space increasing from 0.77 per cent to 0.88 per cent.

According to the bank, household deposits now fund more than 51 per cent of its loan assets (excluding securitisation), up from 45 per cent in December 2017, and forecast to make up the majority of the lender’s funding pool for the “foreseeable future”.

Customer numbers also increased, rising by 11 per cent to 495,053 as at 31 December 2018, with ME revealing that customer numbers surpassed 500,000 in January 2019.

“Increased brand awareness, competitive pricing, increased refinancing during and after the [banking] royal commission, and improved customer retention have all contributed to growth,” ME CEO Jamie McPhee said.

However, the growth was offset by a decline in net interest margin (NIM), which fell from 1.62 per cent to 1.59 per cent, which the bank attributed to an increase in funding costs and “strong competition” for home loans.

The sustained rise in wholesale funding costs, which commenced in the middle of 2018, has prompted several lenders to increase mortgage rates out-of-cycle to ease revenue pressures.

ME does not expect relief from such pressures, stating that it expects NIM pressure to persist amid “falling credit growth, ongoing competition and increased regulatory compliance”.

An 80 basis point fall in return on equity was also reported in HY19, which ME said was primarily due to a strengthening of the bank’s capital position (tier 1 ratio of 12.4 per cent, up from 11.9 per cent at 31 December 2017) following the issue of additional tier 1 capital in November 2017 ($200 million) and December 2018 ($100 million).

However, the lender’s cost to income ratio was down 40 basis points to 61.3 per cent despite “higher than expected regulatory compliance costs”.

Despite revenue pressures, ME recorded an underlying net profit after tax of $55 million, up 8 per cent on the previous corresponding period.   

However, its statutory net profit after tax, which includes IT system remediation and decommissioning costs ($7 million), an impairment charge relating to a new credit card platform ($5 million), and a realised/unrealised loss on hedging instruments ($1.8 million), was $41.2 million, down 11 per cent on the six months to 31 December 2017.

Reflecting on the overall result, Mr McPhee said: “ME had performed strongly in the face of slowing credit growth and elevated funding costs.

“Margin pressure is expected to remain an industry-wide issue throughout the rest of FY19. 

“We expect to continue to increase our market share in FY19 by investing in our brand, digital experiences for customers, and our suite of simple and transparent retail banking products.”

 [Related: Heritage reports profit fall despite 20% loan growth]