Are banks cashing in on higher interest rates?

Tuesday, 20 September 2022

Inflation, falling house prices, rising interest rates: ‘Despite these seemingly challenging circumstances, the banking sector has continued to post impressive profits,’ says KPMG.

Banks appear “immune” to the inflation struggles of households and businesses, posting record profits in the first half of the year, as they extract more money from borrowers.

KPMG has released its latest Financial Institutions Performance Survey.

It said the sector seemed to be immune to the combined impact of inflation, rising interest rates, supply chain issues, regulatory impacts on lending volumes, and a decrease in both business and consumer confidence.

Published on Wednesday, the report said the banking sector posted its second-highest profit ever in the June quarter this year, down only slightly on the previous quarter.

* $777m profit in three months: Covid-19 drags bank profits down

* Bank profits cut nearly in half by Covid-19 economic crisis

Webb's auction house is putting major artworks held in the Bank of New Zealand's art collection under the hammer. (Video first published August 2022).

During the first six months of this year, banks increased their net interest margins, said John Kensington, KPMG’s head of banking and finance.

The net interest margin is the difference between the rate at which banks borrow money and the rate at which they lend it out.

Jon Duffy, chief executive of Consumer, said: “Banks are not charities, so they will always be trying to make a profit.”

But, he said: “The question is increasingly – what is reasonable profit and at what point does profit become excessive?

“I think there will be many Kiwis looking at their mortgage payment going up, KiwiSaver balances going backwards and their everyday living costs going through the roof that will feel rightly concerned that banks can increase profits even as many in the wider economy struggle,” Duffy said.

“Unfortunately, consumers don’t have much choice in New Zealand as all banks appear to follow the same pattern,” Duffy said.

The combined profits of the eight most-popular retail banks for the June 2022 quarter was $1.73 billion, down fractionally from the record $1.74b recorded in the March 2022 quarter, Kensington said.

Part of the reason was that banks were able to improve the gap between their cost of funds and the rate they could lend at.

Jon Duffy, Consumer NZ chief executive, says: “The question is increasingly – what is reasonable profit and at what point does profit become excessive?”

“The net interest margins of the big five banks were each the highest that they have been since at least June 2019, with increases of approximately 10 to 30 basis points between March 2022 and June 2022 alone,” Kensington said.

Over the June quarter, TSB, the Co-Operative Bank, Kiwibank and Heartland Bank were most successful at increasing margins in the past three months.

Kensington said the banks had been talking about rising rates for some time and may have positioned themselves for them, locking in their funding.

It was easier for banks to increase margins in a rising rate environment than a falling one, he said.

Exactly why competitive forces were not forcing the price households and businesses pay for banking down was not clear.

While people could change banks and KiwiSaver providers, Kensington said most households and businesses did not actively switch banks.

Duffy said the Commerce Commission had completed a market study on the supermarket sector and was currently completing a market study on the residential building supplies market.

Perhaps, it should look at the banking sector next, he said.

Kensington said the immunity to the economic hits being taken by households and businesses might wear off for the banks.

Inflation would start to show in their costs, including in their wage bills, he said.

“If I had to bet, I would say the next quarter they will be down a little bit on these record results,” he said.