State Bank Saved By Fall In Bad Debts
Sydney Morning Herald
Saturday November 19, 1994
The State Bank of NSW has relied on falling bad debt charges to avoid a slide in earnings, citing the uncertainty over its sale and the competitive market for the downturn in core profitability.
The bank's concentration in the cut-rate, fixed home loan market and rising bond yields contributed to a 6.8 per cent fall in its underlying result from$173.1 million to $161.4 million in the September 30 year.
But a $49.5 million reduction in the charge for doubtful debts allowed the bank to lift the bottom line result from a $74.6 million loss to a $40.1 million profit.
State Bank managing director, Mr John O'Neill, said the result reflected the competitive banking environment and the unsettling effects of the drawn-out sale process.
"The uncertainty around the sale has not been helpful. Holding the bank on a steady path has been very difficult," Mr O'Neill said. "It's a competitive environment out there and if the competitors can do you in the eye because of the uncertainty, they will do so."
Mr O'Neill said the reduction in net interest margins (an indicator of the return on assets) was a by-product of the bank setting up its balance sheet for future health.
The margin dropped from 2.3 per cent to 2.2 per cent during the year, with the second half of the year showing worsening margin slippages. Net interest income fell 6 per cent to $437.7 million, while assets also fell as the bank continued to restructure its balance sheet.
Mr O'Neill admitted that the interest margins were low, but said the increase in business lending and a decrease in provisions should improve margins during coming years.
"In terms of business and balance sheet mix we have almost reached the objective we set ourselves when we started the repositioning of the bank some four years ago," he said.
"We have virtually exited the wholesale banking market - a market in which we had no long-term natural presence."
State Bank wrote 49 per cent more home loans during the year, with 75 per cent of the $3.5 billion written being of the low-margin, one-year capped variety.
But Mr O'Neill was confident that the current 90 per cent retention rate would allow an increase in future margins as mortgagors refinance into full rate loans.
He said the use of capped loans would fall in the current year due to the higher funding costs associated with the product.
Operating expenses fell by 1 per cent to $458 million, leaving the operating expense to income ratio to rise by more than 1 percentage point to 73.9 per cent.
Mr O'Neill said he was aiming to bring the expense to income ratio down to 60 per cent.
"As housing plateaus this year we believe we will see our business loans grow and with that improved margins. I believe that we will continue to improve in terms of profitability," he said.
The chairman of the State Bank, Mr John Lamble, stood by the board's view that the sale conditions to Colonial Mutual were reasonable, although he would not comment on why the deal was not held to be both fair and reasonable.
The proposed sale of the bank to Colonial Mutual was labelled fair and reasonable by the NSW Auditor-General in a report released yesterday.
© 1994 Sydney Morning Herald