Bank profit drop a pivot point: KPMG

Tuesday, 17 July 2018

John Kensington: 'The negative movement of both profits and impairment will be watched closely in the next quarter.'

Banks' record-setting profit run has come to an end but industry commentators say no one will panic yet.

KPMG's latest Financial Institution Performance Survey shows New Zealand banks' profit dropped 11.35 per cent in the March quarter compared with December, to a total $1.2 billion.

Interest income increased by $54 million across the banks, non-interest income dropped $144m and operating expenses grew by $16m.

A significant change in the quarter was that impaired asset expenses increased 263 per cent, or $122m. ANZ, BNZ and Westpac reported the biggest increases.

These expenses are associated with things such as loans that the bank does not expect to be able to recover at the value it has recorded on its books.

The amount of money lent by the banks increased 1.04 per cent int eh quarter, led by TSB which added 2.95 per cent to its loan book.

John Kensington, head of banking and finance at KPMG, said profits had been at a good level and it had been expected that there would be an increase in impairment numbers at some point.

'They've been very, very low and very, very good,' he said.

Profits were likely to hover around this level for some time yet, he said.

'The negative movement of both profits and impairment will be watched closely in the next quarter, particularly at a time when global markets and geopolitical factors show some signs of volatility and uncertainty.

David Tripe said he would have been more surprised to see profits increase.

'While it might be a pivot point, it's certainly not time to panic as the New Zealand banking sector as a whole still remains strong.'

Banking expert David Tripe, of Massey University, said the profit drop was not a surprise.

He said banks would only come under pressure if there was a significant decline in their interest margins – the difference between what they pay to borrow money and what they charge to lend it.

Increases in international lending rates could start to have that effect now, as local rates remain low.

But all the banks are still making more of a margin than they were a year ago.

Heartland had the biggest interest margin of the survey, with 4.5 per cent. It has a significant reverse mortgage book, with higher interest rates.

Kensington said it was likely that New Zealand banks would implement changes as a result of the scrutiny the Australian Royal Commission of Inquiry into Misconduct in the Banking, Superannuation and Financial Services Industry as put on them.

Processes could be tweaked and there would be a cultural shift, he said, as banks put more emphasis on outcomes for customers.