Housing puts dent in bank profits

"It would be easy to be a bit gloomy about this result but it must be remembered the base numbers are very strong." John Kensington, KPMG

A slowdown in the housing market and higher operating costs have taken the wind out of bank profits.

The latest update from KPMG, which covers the country’s biggest nine banks, shows the New Zealand banking sector’s profits were stable in the June quarter.

The country’s banks experienced a 1.04 per cent decrease in profit from $1.2 billion in the March quarter to $1.19b.

John Kensington, KPMG’S head of banking and finance, said the major contributing factor to the dip in profits was an increase in operating expenses. He said banks also had rapidly increasing regulatory costs.

This was offset by increases in net interest income and noninterest income, along with a significant decrease in impaired asset expense. Net interest income rose 3.32 per cent to $2.3b.

‘‘The banking sector has a continued focus on sustainable and diversified lending, but at a lower rate than previously which is why we’re seeing this relatively flat, albeit still profitable and strong, performance,’’ he said.

Gross loans and advances remained relatively stable with only a $4.61b or 1.18 per cent increase, continuing the threeyear slow growth trend.

‘‘You can see evidence of better quality sector loan books in the lower level of total provisioning, down 6.8 per cent from the previous quarter,’’ Kensington said.

‘‘The industry is continuing to focus on quality lending and this reduction in provisioning indicates their confidence in the quality of their loan books.’’

Interest rates on lending grew faster in the quarter than the increase in cost of funding.

This meant almost all survey participants reported an increase in net interest margin – overall from 2.01 per cent to 2.07 per cent.

Interest income rose by 2.32 per cent to $5.03b, while interestbearing liabilities essentially remained constant.

Housing demand slowed as tighter controls restricted the movement of funds offshore from China and the loan-to-value restrictions imposed by the Reserve Bank slowed local investor activity.

‘‘One area that has seen some change is the housing market, with house price growth flattening or receding, the time to sell increasing and the number of sales falling,’’ Kensington said.

‘‘It certainly isn’t a market collapse but it is a slowing down.’’

He said it was tougher for banks in a slower property market because rapidly rising house prices allowed them to lend more money more easily. But he said it was not yet a problem: ‘‘They’re still making good profits.’’

Banks were focusing on making sure their lending was good quality, he said.

Kensington said the results should not be viewed in too negative a light because the banks had come off a strong period of growth.

‘‘It would be easy to be a bit gloomy about this result but it must be remembered the base numbers are very strong,’’ he said.

‘‘It should also be remembered that New Zealand has one of the strongest, most well-served and competitive banking sectors in the world; this represents a period of consolidation by the banks.’’