Covid-19 makes $1.6b hole in bank profits

Tuesday, 23 February 2021

Covid-19 has slashed bank profits – but how quickly they recover will depend on the strength of the wider economy, KPMG says.

The accounting firm has released its latest Financial Institutions Performance Survey, which shows that the New Zealand banks' combined profits dropped in 2020 by the largest amount in 10 years.

Bank profits were down $1.58 billion in the year, or 27.57 per cent, to $4.14b.

That was driven by an increase in impaired asset expense of $1.08b or 275.2 per cent, and an increase in operating expenses of $486.24 million, or just over 9 per cent.

* Covid-19 takes 20 per cent bite out of bank profits

The banking sector's finances have taken their biggest annual hit in in a decade.

* NZ banks say 'no' more often, driving customers to non-bank lenders

The banks’ net interest margin – the difference between what they charge for lending and pay for saving – dropped from 2.1 per cent to 1.96 per cent.

It is a bigger profit hit than suffered in the immediate aftermath of the global financial crisis. Then, profits slipped 1.2 per cent in 2007 and 0.1 per cent in 2008 before plummeting 98.8 per cent in 2009.

KPMG head of banking and finance John Kensington said banks would have been braced for a Covid-19 effect on their profits. While the increase in impaired assets was large, he said it was off a low base. They were calculated on a scenario of what could be expected to happen and many banks might find their books in much better shape in reality, he said.

Banks’ home loan books have grown substantially/

“I think that what is starting to show up is that the level of provisions which [have been] created to date as a result of Covid and which are based on forward-looking indicators are probably looking to be ahead of the actual levels of defaults that have eventuated.”

He said, like a lot of the economy, banking had not suffered as big a pandemic blow as had been feared.

“The difference between now and the GFC is that there has been enormous government support and banks are now part of the solution – working together with the Government to help customers get through the pandemic.

“No one knew exactly what the impact of Covid-19 would be with many forecasting exercises subsequently proven wrong,”

The biggest concern was the level of uncertainty about the direction of the economy, he said.

There was a range of factors at play, such as the vaccine rollout and timing of the reopening of the borders. Supply chain issues could become a headache if they lingered and affected imports and exports, he said.

But he said the country was well placed, given the success of the health response.

“New Zealand is in as good a position as any to ride out the pandemic.”

Mortgage lending grew almost 7 per cent over the year, although a 5 per cent reduction in business lending reduced the overall rate of lending growth to 3 per cent. Kensington said the banks had been responsible and controlled in their lending.

Some had brought in loan-to-value restrictions before the Reserve Bank required them.

Kensington said it seemed likely pressure would continue in the mortgage market as house prices continued to rise.

People were returning to New Zealand and looking for a place to settle, he said, capital gains made property an attractive investment and the low cost of servicing a mortgage made it cheaper for some people to buy than rent. On top of that was a fear of missing out.

Kensington said that New Zealand had “bounced back” after each lockdown so far, and spending was still up year-on-year in many cases.

“It will be interesting to see whether this level of spending can be sustained. While the high house prices and low interest rates are contributing to confidence amongst homeowners, there are a lot of people for whom the ending of government assistance could have had a huge impact.”