ASB preference shares to be redeemed in May

INVESTORS in ASB perpetual preference shares are most likely ecstatic that Commonwealth Bank of Australia has decided to redeem them on May 15.

CBA says the two tranches of preference shares, issued in 2002 and 2004 with face values of $200 million and $350 million respectively, ceased counting towards ASB’s Tier 1 capital from January 1, 2018, although they continued to count as Tier 1 capital for CBA itself.

CBA will redeem both at face value plus any accrued interest and their redemption will reduce CBA’s capital by about 11 basis points.

The redemption is good news for investors because both issues had been trading at deep discounts. The $200 million 2002 issue last traded on Tuesday at 85c in the dollar; the $350 million 2004 traded at 82.5c in the dollar.

Both issues have since traded at 99c.

‘‘Clients will be absolutely delighted because they will be redeemed at par. For holders of these, that is a fantastic announcement,’’ financial adviser Murray Weatherston, of Financial Focus, said.

‘‘If you were being churlish, all you might say is ‘why did it take them so long?’ ’’

The Reserve Bank of New Zealand is conducting a review of bank capital and is proposing that the big four banks will have to lift their Tier 1 capital from 6% of riskweighted assets to 16% over a fiveyear period.

It has also proposed that instruments such as preference shares and other forms of quasiequity will no longer be allowed to count as Tier 1 capital.

The announcement of the redemption came as ASB reported a 6% increase in firsthalf net profit to $608 million and CBA reported a 6% drop in net profit to $A4.6 billion for the six months ended December.

One of the most notable aspects of ASB’s results was that its deposits are growing faster than lending but that it still has a $19 billion, or 22.4% funding gap.

Advances to customers rose 6% to $85 billion while deposits rose 8% to $66 billion.

Its net interest margin rose one basis point to 2.21% from the first half last year, although that is down from 2.27% in the second half last year.

Charges against profit for bad debts jumped 73% but were still tiny at $45 million. ASB’s costtoincome ratio also improved 70 basis points to 34.8%.

CBA’s presentation shows ASB’s loans to dairy farmers rose to $7.7 billion from $7.3 billion a year earlier but that impaired loans fell to 4% of the portfolio, or $321 million, from 5.5%, or $399 million, a year earlier.

CBA’s fall in profit reflected a fall in net interest margin, weaker insurance results due to a $A61 million increase in claims from storms in New South Wales and Victoria and customers switching from interestonly loans to principal and interest loans.

It also reflected a 4.8% drop in other banking income including commissions and fees. Trading income fell 11% due to weaker markets.

CBA has come under sustained fire from regulators and the Kenneth Hayne royal commission into financial services. ‘‘Our transformation to be a simpler, better bank is well under way,’’ chief executive Matt Comyn said in a statement announcing CBA’s results.

‘‘We will continue to take action to address issues, earn trust and be a better bank for our customers.’’

ASB chief executive Vittoria Shortt also made comments inspired by the parent bank’s strife.

For example, Ms Shortt emphasised ASB’s investment in ‘‘the wellbeing’’ of New Zealand.

‘‘Banks play an important role in people’s lives and we recognise the trust placed in us to do the right thing,’’ Ms Shortt said.