Bank profits suffer as pressure goes on: 'We can't expect a record every quarter'

Tuesday, 10 September 2019

Bank profits have flat-lined as pressure goes on their lending margins.

KPMG has released its latest Financial Institutions Performance Survey for the June quarter.

It shows that banks' combined profit was down 0.45 per cent to $1.45 billion in the quarter.

In the March quarter, profits were up almost 9 per cent on three months earlier.

* Banks make another record profit in New Zealand

* Bank profit drop a pivot point: KPMG**

KPMG head of banking and finance John Kensington said it reflected a general decline in business confidence, the impact of 'conduct caution' in banking and a general winter slowdown.

'To some extent, we can't expect a record profit every quarter.'

KPMG said banks' combined profit was down 0.45 per cent to $1.45 billion in the quarter.

He said it was still a strong result and likened it to the All Blacks going to the Rugby World Cup and winning every game by one point.

The reset of KiwiBuild and the length of time infrastructure projects in Auckland were taking had dented business confidence in the Government, he said.

Net interest income and non-interest income lifted for the banks in the quarter and there was a drop in impaired assets but that was offset by large increases in their operating expenses and tax.

The Official Cash Rate (OCR) was cut to a record low 1 per cent during the quarter.

Kensington said the extent of that drop took some people by surprise. While the Reserve Bank may have intended it to encourage people to spend, some took it as a warning that the economy was in worse shape than they realised and they should put off big purchases and business decisions, he said.

Low interest rates restricted the margin banks could make.

ASB, Kiwibank, SBS and the Co-Operative Bank all reported a drop in interest margin in the quarter. ANZ had the biggest margin of the main banks, at 2.2 per cent.

Kensington said, when banks were borrowing at 1.5 per cent to 2.5 per cent on average, they could lend at about 4 per cent to 4.5 per cent. But if their cost was borrowing, they could probably extend their margin out to 3 per cent or more.

'If they were borrowing at 2 per cent and trying to add 3 per cent or 4 per cent, they wouldn't get away with that.'

Banks were also increasingly cautious about who they lent to, with one eye on the possibility of new rules requiring them to hold more capital.

The amount of money lent to borrowers increased only 1 per cent in the June quarter. Solid growth is about 3 per cent or 4 per cent.

Kensington said there was a significant opportunity for second-tier, non-bank lenders to pick up some of the business banks were turning away.

He noted the inverted yields seen in US treasuries, which have sparked fears of a recession. An inverted yield curve is one where long-term rates are lower than short-term.

'Whether this is a bellwether indicator of tougher times to come, only time will tell. This will be no doubt an indicator that many will track keenly.'