ASB boss Vittoria Shortt on 7% profit drop, political scrutiny, and that ‘challenging’ pay packet

Friday, 16 August 2024

Vittoria Shortt, chief executive of ASB is very well paid, but says her ‘rem’ is benchmarked to the pay of executives at other big corporates.

Vittoria Shortt does not sound too irritated when asked about the $5 million-plus pay she got for bossing ASB through a “challenging” 2024 financial year.

“It is a challenging figure, I understand,” she said.

The big pay packet came despite the bank’s statutory profit having dropped 7% to a mere $1.46 billion, and its cash profit (the ongoing normal operations of the bank) fell 10%.

That was partly because executive remuneration (Shortt calls it “rem”) is lumpy, and payments made this year can relate to performance in a previous year.

The drop in profit was not unexpected for shareholders, but Shortt might be forgiven if she let out a sigh of relief that the bank was not celebrating another record profit given the intense political scrutiny on banks.

Wednesday didn’t just see ASB announce its profit.

It also saw Parliament’s finance and expenditure select committee publish the terms of reference for its inquiry into banks, which are not flavour of the month with finance minister Nicola Willis. Among the topics for the inquiry is whether banks earn too much money.

Why was ASB’s profit down?

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The bank’s margins on home loans were down as banks competed for scarce borrowers, and depositors had to be paid more for their term deposits, as people shifted from savings accounts to term deposits.

“As the interest rate increased term deposits became really attractive, so we’ve seen a lot of people shifting the types of products they use, which is normal, rational behaviour,” Shortt said.

On top of that, ASB saw costs rise, partly as a result of having to spend more on fraud protections after a year in which all banks stood accused of not doing enough to keep the public safe.

The spend in the last year alone was $100m, Shortt said.

What should the public make of your $5m “rem”?

“Exec rem is always going to be controversial,” Shortt said.

“I think the important part is its benchmarked, and that’s how boards set executive rem,” she said.

But she said: “There’s an anomaly in there.”

“There’s an unusual payment in there from 2019.”

Executive pay packets are made up of salary, KiwiSaver contributions, and short and long-term incentives, including share rights.

Incentives are linked to the financial performance of the bank, as well as the reputational standing of the bank compared to its big bank rivals.

Short is also a big shareholder in he Commonwealth Bank of Australia (CBA) holding 48,223 ordinary shares and 73,040 in deferred share, restricted share rights, and long-term performance rights. CBA shares are worth just over A$132.

How are households doing?

Serious mortgage arrears have edged up. At the end of June, $2.7b of ASB’s $76 billion of home loans had outstanding repayments due.

While that was down from $3.3b the previous year, the serious arrears of loans 30 days or more overdue was up from $553 million to $610m.

“Around 600 of our personal customers are receiving support because they are financially stressed, ie. the interest rates, and inflationary impacts on household budgets are causing problems,” Shortt said.

“And we have around 3000 of our customers we are supporting for what I would call life events like illness, divorce, and jobs.”

That was from over 1.5 million customers.

“Households are making a lot of really difficult decisions, and they are giving up on things to make their budgets work, they are showing they are pretty resilient,” she said.

Are MPs right to be worried about banks pulling back on farm lending?

“Our rural sector is really important to us at ASB. We are big fans of the sector, and are continuing to invest in it,” she said.

But, she says: “The big thing I want for the sector is balance sheet resilience.”

Drought is a threat farmers must contend with.

Export markets can be impacted by external factors, she says.

“That has been a big focus of ours. It doesn’t mean we don’t like the sector at all,” she says.

Resilience was also needed to cope with unhelpful weather.

“This year we’ve seen some areas of New Zealand are too dry, and some areas are too wet,” she says.

She acknowledged the bank’s balance sheet focus would have resulted in some farmers being asked to reduce debt.

ASB said lending to the rural sector increased 1% during the year.

Are banks charging farmers too much?

Federated Farmers told MPs in May that farmers felt they were being overcharged for loans, compared to people borrowing to buy homes in cities.

But Shortt said farm loans were more risky than home loans.

“We can see that in our own data. If I go back and have a look at the last 10 years of rural losses versus home loan losses, you can see they are more than twice, despite the fact that our rural book is a smaller proportion of our overall lending,” she says.

Are bank climate policies a threat to farm lending?

One of the areas the select committee inquiry will delve into is whether bank climate policies to reduce the emissions they finance are a threat to farmers.

The worry is that as banks seek to reduce the emissions they fund, they will lend less to farmers, and may even charge higher emitters more for their loans.

ASB says it is committed to supporting New Zealand's transition to a low emissions, climate-resilient economy.

Shortt thinks that thinking is misplaced.

“I think the real driver of all of this are the customers. I think it’s the Nestles, the McDonald’s, its actually the end user of the products that we know are asking supplier to reduce their emissions,” she says.

That is a challenge to the rural sector all around the world.

She says ASB is demonstrating its support by working with the AgriZero project; a partnership between the New Zealand government and major agribusiness companies like Fonterra and Silver Fern Farms to help farmers reduce emissions while maintaining profitability and productivity.

What about households?

While farmers may feel under threat from bank climate policies, at the household level, the bank’s strategy has been about incentivising households to go greener through energy efficiency loans.

Green top-up loans for existing mortgage holders to do things like buy electric cars, or replace gas fires with efficient electric heaters.

Shortt says 4000 customers have taken them up.

The loans come with an interest rate of 1%, which is lower than ASB’s cost of funding.

ANZ chief executive Antonia Watson, Westpac chief executive Catherine McGrath, ASB chief executive Vittoria Shortt and Bank of New Zealand chief executive Dan Huggins. All attended the Commerce Commission conference in May.

“The thing about the electrification of homes is it also reduces your costs,” she says.

Will she front the select committee inquiry herself?

All the big bank chief executives turned up in person to the Commerce Commission’s three-day conference on competition in retail banking in May.

But they didn’t do that for the Primary Production select committee in the same month, and the lobbyists they sent on their own behalf failed were judged by MPs to have been unconvincing, and to have shown “hubris”.

“I’m looking forward to it, just as I did for the Commerce Commission,” Shortt says.