New Zealand’s banks’ combined annual profit surged by more than $1 billion, topping $7 billion for the first time, according to KPMG’s annual Financial Institutions Performance Survey (FIPS).
It’s an outcome likely to add fuel to the fire amid calls for a probe into bank profits and competition, with drums beating for a Commerce Commission market study. Additionally the FIPS shows the big four banks – ANZ NZ, ASB, BNZ and Westpac NZ – saw their combined market share slip only slightly year-on-year to 90.05% from 90.39%.
The banking sector’s net profit after tax rose $1.06 billion, or 17.3%, to $7.18 billion. The annual FIPS covers 20 banks over the period between October 2021 and September 2022.
Net interest margin rise boosts profit
KPMG notes the key to the profit rise was a $1.53 billion lift in net interest income. This was driven by a 13 basis points increase in net interest margin to 2.10%. A $28 billion, or 6%, rise in gross lending to $503.3 billion, and a $470 million, or 17%, increase in non-interest income to $3.30 billion, also helped.
This year’s annual profit rise was lower than last year’s $1.99 billion, or 48%, increase that took combined net profit after tax to $6.13 billion. However, last year the increase was bolstered by a $1.69 billion reversal in impaired asset expense following big loan provisioning from lenders in 2020 in the early days of the Covid-19 pandemic.
“The banks have enjoyed a very good year,” John Kensington, KPMG’s Head of Banking and Finance, says of the latest annual FIPS.
“This is on the back of controlled loan growth and margin expansion. The banks have positioned their businesses to benefit in a rising interest rate market, and their prudent lending policies have continued to allow them to report very low loan losses,” Kensington adds.
During the period covered by the FIPS the Reserve Bank increased the Official Cash Rate from just 0.25% to 3%. Over the same time period the average interest rate on popular two-year bank mortgage rates rose to 5.47% from 3.052%, and the average interest rate paid on six-month term deposit rates rose to 3.35% from 1.12%.
Kiwibank gains market share, ANZ loses it
Among the major banks the FIPS shows Kiwibank enjoying the biggest market share increase, up 22 basis points to 5.19%. Conversely ANZ NZ’s market share fell the most, down 27 basis points to 27.62%.
Banks’ funding costs rose for the first time in five years, up 26 basis points to 1.35%, thanks to the rising interest rate environment.
The FIPS notes that whilst banks returned to an aggregate impairment expense this year after the largest impairment recovery in the survey’s history last year of $213.43 million, it was still the second lowest level of loan impairments reported since 2006. However, KPMG suggests some banks could be reconsidering whether some of their loan provisions, raised during the Covid-19 pandemic remain needed over the next couple of years.
Past due, but not impaired assets, increased $215.15 million, or 22.2%, to $1.18 billion. And the sector’s cost to income ratio fell 345 basis points to 37.53% as operating income rose 14%, or $2 billion, well ahead of the 4.3%, or $250 million, increase in operating expenses.
Over the next couple of years Kensington predicts; “flatter [bank] earnings and higher [loan] impairment growth than we’ve seen for some time.”
This comes with the Reserve Bank acknowledging it’s deliberately trying to engineer a recession in order to get inflation down from above 7% to its target range of 1% to 3%.
Of the 20 banks included in the FIPS, 16 recorded an increase in profit. The four outliers were JPMorgan Chase Bank, The Co-operative Bank, TSB Bank and MUFG Bank.
It’s the 36th year KPMG, an auditing and financial advisory firm, has undertaken the FIPS.
*The ‘key figures’ and table below come from the FIPS.