Banks at ‘pivot point’ as profits decline

Banks’ record-setting profit run in New Zealand has come to an end but industry commentators say no-one will panic yet.

KPMG’S latest financial institution performance survey shows banks’ profits of $1.2 billion in the March quarter were 11.35 per cent lower than in the previous three months.

Interest income rose $54 million across the banks, noninterest income fell $144m and operating expenses grew $16m.

A significant change in the quarter was that impaired asset expenses increased 263 per cent, or $122m. ANZ, Bank of New Zealand and Westpac reported the biggest increases.

These expenses are associated with things such as loans that the bank does not expect to be able to recover at the value it has recorded on its books.

The amount loaned by the banks rose 1.04 per cent in the quarter, led by TSB which added 2.95 per cent to its loan book.

John Kensington, head of banking and finance at KPMG, said profits had been at a good level, and a rise in impairment numbers at some point had been expected.

Profits were likely to hover around this level for some time yet, he said.

‘‘The negative movement of both profits and impairment will be watched closely in the next quarter, particularly at a time when global markets and geopolitical factors show some signs of volatility and uncertainty.

‘‘While it might be a pivot point, it’s certainly not time to panic as the New Zealand banking sector as a whole still remains strong.’’ John Kensington of KPMG

Banking expert David Tripe, of Massey University, said the profit drop was not a surprise.

He said banks would come under pressure only if there was a significant decline in their interest margins.

Increases in international lending rates could start to have that effect now, as local rates remain low. But all the banks are still making more of a margin than they were a year ago.

Heartland had the biggest interest margin of the survey, with 4.5 per cent. It has a significant reverse mortgage book, with higher interest rates.

‘‘The New Zealand banking sector as a whole still remains strong.’’