Banks records profits, but impact of economic shock to come

June 29, 2022 5:20 am

The ANZ remained the biggest bank with more than $190b in assets, with Westpac second, followed by BNZ and ASB. [Photo Credit: RNZ]

The country’s banking sector continues to rack up record profits as it counters a slowdown in lending with improved margins, and lower expenses, but it could soon be the end of the golden weather.

Business advisory company KPMG’s latest review of the sector showed the total profit of the banks for the three months ended March rose 8.1 percent on the previous quarter to a record $1.74 billion, and 6.2 percent higher than the same quarter a year ago.

Much of the increase came from a 2.1 percent rise to $2.99b in net interest income – the difference between banks’ interest earning assets and their interest bearing liabilities – as well tightly controlled expenses.

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KPMG head of banking John Kensington said the higher profits seemed to suggest banks have been immune to the rising inflation, interest rates, and various Covid-19 or war related disruptions, but the effect of stronger economic headwinds would likely start to show later in the year.

“How deeply the impact is felt is yet to be seen – the sector has been planning for these, and we’ve only just seen the first signs of an impact in the form of provisioning levels increasing.”

The past year has seen bank profits boosted by the reversal of money put aside for bad loans that did not eventuate, but the latest report showed $53m extra put aside compared with a gain of $35m the previous quarter.

Kensington said it usually took a couple of years for the impacts of major economic shocks to be fully felt in New Zealand and reflected in bank performance.

“In the next year or so we would expect to experience the full effect of the pandemic and the resulting inflationary pressures, increased interest rates, supply chain and labour shortage issues.”

House lending fell to the lowest level since June 2020 to $17.6b from $24.7b in the previous quarter, which Kensington put down to a cooling housing market, rising interest rates, and the tight lending rules of the Credit Contracts and Consumer Finance Act (CCCFA), which are due to be eased next week.

Kensington said he did not think the changes to the CCCFA would have much impact on the level of lending.

However, the overall amount in gross loans and advances increased 1.2 percent during the quarter.

“This suggests either lower principal repayments made by borrowers as interest rates rise, fewer borrowers switching between lenders, or a combination of both.”

Banks had trimmed their operational expenses by 1.9 percent, and the level of costs to income was at its lowest level in five years.

The ANZ remained far and away the biggest bank with more than $190b in assets, with Westpac second, followed by BNZ and ASB. The biggest locally owned bank was Kiwibank in fifth spot.

However, Kensington said the country’s banks were well capitalised, which was “one very large silver lining” to cope with future challenges.