Bank profits fall, worst to come

KPMG'S quarterly report shows bank profits have dropped again

The full impact of Covid-19 on the banks is likely to become clearer in the next six months as the wage subsidies end and the recession takes its toll on businesses and households.

That’s the view of KPMG’S head of financial services John Kensington who compares the impact of the pandemic on New Zealand’s economy to a car crash.

“I think the sense is the body blow has been taken but I think looking forward it would be wrong to think in any way that we are out of the woods. And it is almost like the impact of the event has happened but now we are climbing into that long tail that will go on for a long time.

“I would say this next quarter and the one after will be where you really get to see a bit of an indicator.”

Banks have already taken a hit to their bottom lines. In the June quarter KPMG’S Financial Institutions Performance Survey report found banks’ profits dropped 13.25 per cent to $776.9 million driven by lower interest and non-interest income.

Bank margins continued to be squeezed over the quarter as the lower cash rate drove lending rates lower. They are expected to remain under pressure with the Reserve Bank indicating a negative cash rate could be on the cards next year.

The June quarter profit drop was on top of the 20.41 per cent drop in the March quarter.

Comparing June quarter figures for 2020 to the same quarter last year show bank profits for the quarter halved, falling from $1447m to $777m.

As well as a fall in profits, provisioning — the amount of money banks put aside for future losses — tripled during the six months to June 30.

In June 2014 banks’ provisioning was $1.3 billion. As of December last year it had risen to $1.6b largely due to an increase in bank loan books.

But in the six months provisioning to June 30 this year it had increased to $2.5b — a rise of $900m in just six months.

“Economic support packages from the Government have provided a welcome buffer for many New Zealanders. However, as the end of the wage subsidies draws closer and we enter the deepest national recession in history, concerns that we are yet to see the full economic impact of Covid-19 are mounting.

“Though recent forecasts suggest the outcome may be better than initially thought, banks’ provisioning has continued to increase to mitigate the pending risk.”

Kensington said banks had put overlays on their provisioning models to try to predict how many loans would default in the future.

But whether they were enough would depend on how long banks believed the downturn would last and how soon the recovery came.

“If there is a vaccine tomorrow — those provisions will be more than adequate. A second wave that cannot be stopped around the world or worse, a variant of it that kicks off — those provisions may not be adequate.”

He said a lot may depend on how soon the border reopens again.

“Lockdown was the easy part in one sense. It’s how you unlock it — that is going to be trick right across the board — how you do open things back up again?”

Kensington predicted the end of the wage subsidies would affect lower income earners first.

“I think the real hit will come in mortgages, when any deferrals start to come off.”

The mortgage deferral scheme has been extended until March 31 but anyone who took a deferral is not guaranteed an extension, with the banks saying it will be assessed on a case-by-case basis.

So far bank lending has remained resilient. In the June quarter lending was flat, dropping just 0.28 per cent despite almost the whole month of April being spent in level 4 lockdown.

June was a bumper month for lending while July was ahead of the same month last year.

The removal of loan-to-value restrictions helped bolster both firsthome buyers and investors driving a 30 per cent increase since July recording the highest lending since 2013.

Kensington said he would be looking out for three indicators in the next six months; what happens to interest margins, where does deposit money go and, based on that, what happens to lending; and lastly what happens to provisions.

“I do think the next quarter and particularly the one after will paint a very interesting picture. Banks will be seeing economic data flow before we do and knowing what is happening before we do.”— NZ Herald