KPMG bank report shows banks lifting margins despite claiming 'concern' for borrowers

Monday, 13 March 2023

Banks don’t appear to bother pricing different risk levels for mortgage lending into their interest rates, says Sam Stubbs.

Banks ramped up their margins to generate a record $7.15 billion in after-tax profits last year, a report from consultancy KPMG says.

But as they prospered, many households faced an increasingly tough time, and bank executives interviewed for the KPMG Financial Institutions Performance Survey said they were “concerned about borrowers’ ability to service their debt as interest rates rise”.

When people apply for home loans, banks run their applications through “serviceability” calculators that check whether they will be able to afford repayments, if loan rates rise.

Some borrowers under “great pressure” were people who had “their serviceability tested at a rate lower than current interest rates”, banks told KPMG.

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Survey participants were starting to worry about borrowers who faced increasing mortgage repayments as rates moved outside their “serviceability range,” said report author John Kensington, head of banking and finance at KPMG.

Some of those under great pressure were people banks funded to buy homes at the peak of the housing market despite them only having small deposits.

Some bankers told Kensington that around half of their borrowers still had loans with rates under 4%, but would have to refix their loans at rates of more than 6% in the first six months of 2023.

Bankers’ concern extended to younger borrowers who had the “naivety” to believe home loan rates would fall back to pre-Covid levels of 2% to 3%, the report said.

“Overall survey participants believed interest rates would stay at these higher levels for a couple of years, and borrowers would have to get used to this new level of debt repayments,” Kensington said.

John Kensington, head of banking and finance at KPMG, defended banks’ high profits.

More borrowers would fall into arrears on their loans, bankers told Kensington.

KMPG’s report comes as pressure mounts for a Commerce Commission probe into high profits in the sector.

The report covers banks for the financial year ending September 31, 2022, which was a 12-month period in which banks’ net profit after tax rose 17% to $7.18b.

That was driven by an increased disconnect between the rates banks charge on their loans and the rate they paid to depositors.

“The key to the success of the banking sector over the year was a $1.53b increase in net interest income,” Kensington said.

Net interest income is the amount of interest banks collect from loans, minus the amount of interest they pay depositors in their savings accounts and term deposits.

The taxpayer helped fund some of the margin increase, with Kensington reporting that some of the bankers surveyed acknowledged many banks were assisted by taxpayer-backed funding from the Reserve Bank Te Pūtea Matua’s Funding for Lending programme that gave them access to cheaper funding.

But bankers expected to have to lift deposit rates this year.

But Kensington mounted a defence of bank profitability, saying banks earned a low return on equity compared to other large New Zealand companies, though he did not compare their return on equity to overseas banks.

“We currently have a strong banking sector which is pivotal to our country, the economy and an essential to the everyday lives of New Zealanders,” he said.

“Banks are large organisations with equally large profits, but the numbers show that they are no more profitable than many other major companies operating in New Zealand.”

Despite banks’ success, many bankers felt the sector was facing a deluge of new regulation.

That included Conduct of Financial Institutions laws that will require banks to treat their customers “fairly”.

Bankers remained unhappy at tighter responsible lending regulations introduced in late 2021, which they claimed meant they lent less money, but acknowledged that might have saved some buyers from rapid losses of equity.

KPMG reported that it wasn’t just a good year for banks.

Bankers found themselves in high demand, and able to demand high salaries, as did IT workers as the banks scrambled to upgrade bank systems.