ASB lifts first-half earnings on bigger loan book but skinnier margins

ASB Bank boosted first-half earnings 6% as the local unit of the Commonwealth Bank of Australia grew its residential, commercial and agriculture lending, even as more expensive funding squeezed margins.

Cash profit, the favoured earnings measure for banks that strips out non-core items, rose to $507 million in the six months ended December 31 from $477 million a year earlier, ASB said in a statement. Net profit rose 11% to $525 million.

Net interest earnings rose 5.2% to $923 million as the bank's loan book expanded 11% in the half to $76.06 billion, making up for net interest margins shrinking to 2.21% from 2.32% a year earlier. Customer deposits grew at a more modest pace of 5% to $56.37 billion.

"Banks are now facing a changing dynamic over the increasing volume and cost of international funding needed to meet local lending requirements," ASB chief executive Barbara Chapman said. "With the levels of local deposits failing to keep pace with the amount of lending banks are doing, the increased use of offshore funding has increased funding costs, reducing our net interest margin."

Bank margins reached a nine-year high in 2015 as rampant demand for property and agricultural lending underpinned lenders' income. However, they started to get squeezed through last year as offshore wholesale funding costs rose as low interest rates on domestic retail deposits reduced their appeal.

ASB kept operating costs flat at $411 million, meaning it improved as a ratio to income and Chapman said the bank was continuing to invest in its frontline and digital capabilities.

The bank's loan impairment losses rose to $49 million from $41 million in the same half last year after increased provisioning as a result of the bigger loan book and fewer releases from earlier provisions. CBA noted the increase in New Zealand dairy provisioning, with the outlook dependent on the sustainability of recent improvements in milk prices.

ASB was one of the better performers in the wider CBA group, with the Australian parent posting a 2% increase in cash earnings to A$4.91 billion on a 6% lift in operating income to A$13.13 billion. Net profit gained 6% to A$4.9 billion. The board declared a fully franked interim dividend of A$1.99 per share, payable on April 4 with a February 23 record date.

CBA's Sovereign Assurance insurance division posted a 19% decline in cash profit to $44 million, due to an $8 million loss on investments. The underlying insurance business increased earnings 8.3% to $52 million as insurance premiums rose more than claims, and operating costs fell because of lower spending on technology.

The ASX-listed shares last traded at A$82.63, up 11% over the past 12 months.

(BusinessDesk)