Westpac Banking Corp;'s New Zealand unit chief executive David McLean remains upbeat about the New Zealand economy and said there is a risk the central bank could lift rates late this year rather than next.
"We are still pretty confident about the economy. We think we will have one of the higher GDP growth rates in the Western world going forward," Westpac NZ chief executive David McLean told BusinessDesk.
McLean said while the bank does not expect the central bank to increase the cash rate at Thursday's monetary policy review "we do see that there is more risk around rises in interest rates toward the end of the year." That view is out of step with the vast majority of economists who don't expect rates to lift until well into 2019 in line with the central bank's own forecast.
The central bank's most recent forecast from February showed the official cash rate rising to 1.9 percent in June 2019, unchanged from its prior projection in November. A full rate increase is still signaled by March 2020 when the benchmark rate is forecast to be 2 percent. Markets are expecting the first hike in June.
This particular MPS marks the first with Adrian Orr at the helm and investors will be reading the statement for any changes at the margin and scrutinising Orr's views and plans, in particular after a recent raft of media interviews where he called for richer dialogue.
McLean said the risk of rate increases was higher "particularly when you look at the global situation," noting rates have lifted in the US and the bank bill rate in Australia has risen quite steeply.
"There is much more tone globally around interest rate rises which will probably flow through we think to New Zealand at some stage," he said. "If anything the risk around rate rises is coming forward a little bit."
He made the comments after the bank lifted first-half cash earnings 4 percent as it fattened margins and cut costs with a transformation programme that's introduced greater self-service and shut down several branches. Cash earnings, the preferred measure of the Australian-owned banks, rose to $482 million in the six months to March 31 from $463 million the same period a year earlier, the Sydney-based lender said in a statement.
Net interest margin widened 9 basis points to 2.15 percent as the bank benefited from repricing certain mortgages and business loans, while its expense-to-income ratio fell to 40.15 percent from 44.35 percent in the same period a year earlier. Operating costs fell 4 percent to $468 million due to a transformation programme including increased self-service and digitisation of activity. Westpac closed six New Zealand branches in the period.
"This is a good result across a range of business areas, despite a slowing housing market, a competitive deposit environment, and impairments moving back to more normal levels," McLean said. "These results have been supported by strong fundamentals in the economy,"
Looking ahead, he said he is not expecting the net interest margin to move higher was the competitive banking landscape in New Zealand "will keep a lid on things." He said cash earnings may be "a little bit better in the second half." In the first half result, local cash earnings were restrained by impairment charges of $27 million in the half, compared to a $36 million benefit a year earlier when the bank wrote back the value on some agricultural loans.
New Zealand regulators are putting local bank behaviour under greater scrutiny after the Royal Commission in Australia uncovered some dubious practices, with the Reserve Bank and Financial Markets Authority demanding local lenders demonstrate how their operations differ from their Australian parents.
McLean today said the bank is focused on building confidence and trust: "Westpac welcomes the review announced last week by the Financial Markets Authority and Reserve Bank of New Zealand and will cooperate fully to show the differences between the New Zealand and Australian banking environments."
He said the bank is "confident in our systems and processes," and committed to continuous improvement.
Westpac's New Zealand unit contributed around 10.4 percent of the group's A$4.25 billion total cash earnings.
Net interest income lifted 10 percent to $922 million. The bank's net loans lifted 3 percent to $79.1 billion, while total deposits lifted 8 percent to $61.6 billion, fully funding the loan growth. Two-thirds of the growth in lending was in mortgages, with the remainder in business lending across a broad range of sectors, it said. Most deposit growth was in term products as customers sought higher yields in the low-interest rate environment.