Banks post record profits and close in on $5 billion in interest income as mortgage costs spiral

Tuesday, 28 June 2022

Homes used to cost a lot less, but in previous decades home loan interest rates were much higher. Home loans rates are however on the rise as the Reserve Bank Te Pūtea Matua has been raising the official cash rate to fight inflation.

The total interest hoovered up by the banks from households and businesses is on track to top $5 billion a quarter as home loan interest rates rise, KPMG says.

Rising mortgage rates are contributing to a national cost of living crisis and data from the Reserve Bank Te Pūtea Matua showed at the end of April that just under $110b of home loans would come to the end of their fixed term before April next year.

Borrowers refixing in the next three or six months were likely to get rates starting at 5% or 6%, said John Kensington, head of banking and finance at KPMG.

“Probably a third of people have refixed their loans. There are still two-thirds to go through that process,” he said.

* Banks made record $1.64 billion profits in first three months of the year, KPMG says

Don't worry about owning the best house in the worst street, because this is a great time to sell i, as people are wary about the cost of renovating themselves.

* Reserve Bank data shows big leap in bank profits

KPMG’s quarterly survey of the finances of banks shows that in the first quarter of the year, banks posted record profits.

They had combined interest income of $4.6b, up from $4.1b in the third quarter of last year, and looked set to power past $5b a quarter.

“I will be very interested to see next quarter’s results,” Kensington said.

“I could see it getting up very close to that $5b, if not slightly over it,” he said.

John Kensington, head of banking and finance at KPMG, says many home loan borrowers will be refixing portions of their home loans soon and face significantly higher interest rates.

And the quarter after, it could go higher still.

Painful as breaking the $5b mark will be for households, it is territory they have been in before, data shows.

At the start of 2020, before Covid arrived in the country, banks were collecting more than $5b in interest a month but then the Reserve Bank slashed interest rates in a bid to prevent a recession and an unemployment crisis.

Kensington said the Reserve Bank’s fight to beat off a possible Covid recession had put a lot of money into the system.

“That money has got to come out of the economy,” he said.

Banks earned another record quarterly profit in the first three months of this year, Kensington said, with an 8.08% increase in net profit after tax to $1.74b.

Banks had cut costs and had increased lending margins, KPMG reported.

The introduction of tougher responsible lending regulations may have contributed to bank customers becoming “stickier” and being less willing to move from bank to bank after better deals, Kensington said.

Economists are forecasting ‘’anaemic’’ retail spending growth this year as households are squeezed by rising prices, high fuel prices and increasing mortgage rates.

The banks’ loan books continued to grow at a rate of about 5% a year, which should see their run of record profits continue, Kensington said.

But “I don’t think our banks are making super profits,” he said.

It is not only the higher interest bill households face that makes for worrying reading. KPMG identified a slight tick-up in bad debts, indicating a rise in borrowers in dire financial straits.

Kensington said the banks’ loan book growth might reflect not just new lending but also a slowing of borrowers repaying their loans faster than banks required.

And after a period in which many people paid off their credit cards, card debt was beginning to rise again, Kensington said.

That could be a sign of pressure on household budgets, Kensington said.

“I think if you have got a bank line of credit at the moment, don’t surrender it, because to get it back might be harder,” he said.

The cost of living crunch came at a time households wanted to get out and see the world, Kensington said.

“Someone who might have had $1000 of pay left over each month, might now have less because of fuel prices and rising interest rates, and it comes at a time when they want to travel and do other things,” he said.

It was also hurting confidence to spend.

The Westpac McDermott Miller Consumer Confidence Index has fallen to its lowest level recorded since the survey began in 1988, and Westpac acting chief economist Michael Gordon said: “With interest rates set to rise even further, many households will find the pressure on their finances becoming more intense over the coming months.”

A survey by Westpac of 1600 of its customers in April found 58% had already tightened their belts to cope with inflation and rising home loan rates.

Eating out and takeaways were chopped out of many budgets, and people were spending less on groceries, the survey found.