Banks make another record profit in New Zealand

Tuesday, 18 September 2018

New Zealand banks have ticked off another record profit.

New analysis from KPMG shows the sector made 14.61 per cent more in the June quarter than the previous three months, banking a total $1.42 billion.

It turns around a 11.35 per cent profit drop recorded the previous quarter, and comes as commentary heats up about banks' decisions to close branches in provincial New Zealand.

KPMG head of banking and finance in New Zealand John Kensington said the increase was due to a lift in interest income, of $48 million, and an extra $77m in other income in the quarter.

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ASB had the biggest increase in interest income and Westpac the biggest lift in non-interest income.

Impaired asset expenses also decreased and operating expenses fell.

Banks had to pay $7m less in operating expenses in the June quarter than they had in the three months to March.

Regional development minister Shane Jones has taken aim at banks' profits in recent months, saying they continued to make more and more money while offering less service to New Zealand.

Banking specialist Claire Matthews, from Massey University, said New Zealanders had been wary of banks' big profits for a long time.

'That's exacerbated by the fact that their profits keep increasing.'

People wondered how they managed to do that when they had low cost to income ratios, she said.

But even if their costs remained steady at the same proportion of income, their profits would grow as the size of their businesses did, she said. 

'It's something people are touchy about and it's used to stir up emotion. When they close branches, that's a touchpoint, it's seen as killing a community, even if they didn't use it anyway.'

Loan growth was steady across the banks. TSB had the fastest year-on-year growth, of 13.61 per cent. Heartland followed at 12.28 per cent.

BNZ, ANZ and CBA-owned ASB also loaned more than 1.5 per cent more in the quarter.

Investors were the smallest proportion of borrowers, followed by first-home buyers and other owner occupiers, through investor lending increased compared to earlier quarters. About 20 per cent of lending was done on an interest-only basis, through which the principal, is not paid off.

Kensington said, as well as the growth in lending, the banks' funding costs had dropped, which helped increase the amount of money they made from loans. Term deposit rates offered to savers dropped slightly.

Their reluctance to lend had eased, he said, but their appetite still had not returned to the level of a year ago.

ANZ suggested this week that a move to lift  loan-to-value restrictions was on the horizon. These currently limit lending to borrowers with a deposit of less than 20 per cent to no more than 15 per cent of a loan book. Investors are required to have 35 per cent equity in the deal.

'We expect that the Reserve Bank will take a cautious and gradual approach to easing loan-to-value restrictions,' its economists said. 'An easing in November is possible but settings are expected to remain tight for some time,' the bank economists said.

But Kensington said it was unlikely.

Kensington said the Reserve Bank had an underlying concern about the country's indebtedness.

'If they pull the LVRs off, New Zealanders might go crazy again.'

He said New Zealand had had 'a long period in the sun' and people had limited memories of downturns.

'The Reserve Bank will want to be reasonably prudent on this.'

It wanted people to get into homes but did not want sharply escalating prices, he said.

Kensington said he had begun to wonder last quarter whether the profit drop was the start of a wider banking slowdown. But this had been a strong bounce back.

 'The last two quarters have shown true volatility. It will be interesting to see how the next couple of quarter's results behave as there are contradictory indicators – with, most notably, business confidence still down while other indicators are more positive.'