Bank profits plateau: 'It may be that record bank profits are behind us.' -

Wednesday, 19 April 2023

Is it the end of the golden weather for banks? KPMG thinks they may struggle to set new record profits in 2023.

Banks’ profits plateaued in the final quarter of last year, KPMG’s Financial Institutions Performance Survey said.

“It may be that record bank profits are behind us,” said report author John Kensington.

“The December 2022 quarter’s banking sector results show a strong finish to the calendar year,” Kensington said.

The banking sector, which is dominated by the big five of ANZ, Bank of New Zealand, ASB, Westpac and Kiwibank, made combined after-tax profits of $1.77 billion, in the final three months of last year.

* Housing boom pushes bank profits to a record $6 billion profit last year - KPMG

Recent house price boom is down to interest rates, as Kiwis jumped to buy better homes while rock-bottom rates were around.

* Monthly mortgage lending of $8 billion drives banks' $1.45b profit

That was $2 million less than the after-tax profits in the quarter to September.

“The final quarter helped push the sector to a record profit for the year, demonstrating resilience across the industry following the Covid-19 pandemic and resulting global and domestic economic impacts,” Kensington said.

“It may be that record profits are now behind us as the banking sector looks ahead to face the continued high inflation, an OCR that continues to rise, house prices that many believe have yet to bottom out, and an engineered recession by the Reserve Bank of New Zealand.”

That would all put pressure on households, he said.

“Many may struggle to make their loan repayments.”

Banks increased the money they set aside for bad loans by a combined $100m in the last three months of the year.

Kensington said some households were moving onto mortgage interest rates well above what they were initially tested at.

That is a reference to bank test rates, which banks use in their affordability checking when people apply for loans.

Test rates are set higher than banks’ ordinary home loan rates, and were supposed to help banks work out whether borrowers could still afford to make repayments, if mortgage rates rose. However, mortgage rates rose faster and further than banks expected.

Keith McLaughlin, chief executive of credit reporting company Centrix, said in February mortgage arrears rose for the seventh month in a row, bucking the downward trend of the recent years, during which unemployment remained low.

In February 1.29% of mortgages, or 18,900, were recorded as past due, up 23% year-on-year, McLaughlin said.

The reason was people rolling off fixed-term home loans, and being unable to service higher interest rates, he said.

“This is a concerning trend to observe, and only time will tell if this translates into increased mortgage defaults in the coming months,” he said.

Arrears on personal loans and car loans were also trending up.

Consumer research company Canstar said earlier this week that many people with mortgages were giving banks an easy time by not negotiating for lower home loan rates when they came to refix part of their loans.

Only around 20% of people with mortgages tried to convince their bank to give them a home loan rate that was lower than the bank’s advertised rate, Canstar said.

Banks also faced rising costs for borrowing now the Reserve Bank’s Funding for Lending programme has ended the flow of cheap funding to banks, Kensington said.

However, in the last three months of 2022, the only bank that was not able to earn more out of each customer. The only bank that did not increase its lending margins was the Cooperative Bank, KPMG found.

However, banks earned less in fees during the last quarters.