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

Tuesday, 22 September 2020

Infometrics economists mull quantitative easing in 2020.

New Zealand bank profits dropped again in the June quarter, as the effect of the country’s Covid-19 lockdown was felt.

KPMG’s latest Financial Institutions Performance Survey shows that combined bank profits fell $118.7 million in the three months to June, a drop of 13.2 per cent from the previous quarter. Combined, the sector made $776.9 million.

The decline was on top of an even steeper 20.41 per cent decline in the March quarter. Year-on-year profits in the quarter were down 46.3 per cent.

KPMG head of banking and finance John Kensington said the outlook from here was not clear. How badly banks were hit would depend on how long the pandemic continued.

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Borrowing for house purchases has continued apace.

“If there’s a vaccine developed between now and Christmas and it’s in production by March the impact will be very different from if, for example, there is a really bad second outbreak or another type of similar virus.”

Every bank would be weighing up how long it expected the downturn to last and what the effect on GDP and house prices would be, he said.

They had increased their provisioning as protection against a more sustained downturn that could lead more borrowers to be unable to repay loans.

“In June 2014, the banks’ provisioning was sitting at $1.3 billion, and over the next five and a half years to December 2019 it increased to $1.6b. So, over that five and a half years it went up by $0.3b, largely due to a rising sector book.

“In contrast, the six-month period between December 2019 and June 2020 saw provisioning increase from $1.6b to $2.5b, increasing roughly three times the amount by $0.9b,” Kensington said.

Even though the country was locked down during April and few property transactions settled, lending was only down 0.28 per cent in the quarter and was up 3.18 per cent year-on-year.

“It is worth remembering that June was a bumper month, and lending in July 2020 was actually ahead of July 2019, and the highest July since the Reserve Bank dashboard began recording this data,” Kensington said.

He said the Reserve Bank move to lift the loan-to-value ratio restrictions in April to encourage first-home buyers seemed to be successful. There had been a 30 per cent increase in investor and first-time buyer activity.

Kiwibank had the biggest increase in loans and advances in the quarter, up 1.51 per cent while Heartland had the biggest fall, down 1.98 per cent, followed by BNZ, down 1.36 per cent.

Reverse mortgage provider Heartland had the biggest interest margin, at 4.6 per cent. Of the big four, BNZ had the biggest at 2 per cent.

Net interest income was down 5.02 per cent for the sector overall to $2.48b

Banks were preparing for negative interest rates, he said, and it would be another challenge to add to the “book of challenges” they were facing, he said.

They would still have to pay something for deposits placed with them, which would put their margins under pressure.

They would have to review their revenue streams and streamline their processes.

“However, this is not solely a result of Covid-19. KPMG Australia notes that the Australasian banks’ long run of profit performance was already coming to an end due to a combination of lower credit growth and (in a lower interest rate environment) shrinking net interest margins.”

But he said New Zealand’s banking sector would get through the pandemic in a better state than some. It had gone into the downturn in good shape, he said.

The Government had put a lot of money into the economy to help keep things moving. “It might be a bit tougher going forward… this is not going to be a one quarter impact, it’s the next four quarters at least. It’s a long story.”