Report: third of banks vulnerable in downturn
Many of the world’s banks may not be able to survive an economic downturn, an international consultancy firm says.
But local experts say New Zealand banks are unlikely to be part of the number in danger.
McKinsey & Co issued a report which said that 60 per cent of banks around the world might not be economically viable because their returns on equity were not keeping pace with their costs.
Global return on tangible equity (ROTE) had flatlined at 10.5 per cent, despite a small rise in rates in 2018, it said.
Emerging market banks had seen ROTEs decline steeply, from 20 per cent in 2013 to 14.1 per cent in 2018, due largely to digital disruption that continues unabated. Banks in developed markets had strengthened productivity and managed risk costs, lifting ROTE from 6.8 per cent to 8.9 per cent.
‘‘This is likely the last pit stop in this cycle for banks to rapidly reinvent business models and scale up inorganically. Imaginative institutions are likely to come out leaders in the next cycle. Others risk becoming footnotes to history,’’ the report said.
Claire Matthews, a banking commentator from Massey University, said it was reasonable to suggest banks would struggle in an economic downturn because their impaired asset expense would increase as people fell behind on things such as mortgages.
‘‘Although this is generally a lagged effect as the downturn has to affect their borrowers before affecting the banks.’’
She said the risk of return not keeping up with costs appeared to be more focused on emerging markets, where it had fallen sharply.
New Zealand’s rate of return was more like 14.5 per cent, she said.
‘‘I don’t believe economic viability is an issue, but it is possible – and to be expected – that their level of profitability would reduce in an economic downturn. A challenge for the New Zealand banks is the low level of interest rates which gives less room to move on the interest margin.’’
Economist Shamubeel Eaqub said governments would be reluctant to let banks fail.
‘‘New Zealand’s banks are well equipped to handle a significant economic crisis.’’
New Zealand Bankers’ Association chief executive Roger Beaumont
But he said New Zealand banks were still making good profits and had made it through the global financial crisis of last decade in good shape.
They were ‘‘vanilla’’ compared to international peers, he said, because they did not have the investment banking divisions that could lead to more impairments.
He said the biggest concern for New Zealand banks was the level of debt on their balance sheet, particularly lending to farms.
If there was a global downturn, the most pressing concern for New Zealand banks could be access to capital.
Economist Cameron Bagrie said New Zealand banks were very profitable by international standards. The return they were getting was ‘‘sensational’’ he said.
He said the Reserve Bank was trying to shore up the New Zealand banking sector’s resilience with its proposal to increase their capital requirements.
He said that was ‘‘bang on the money’’ although there was still discussion to be had about what level of capital was appropriate.
New Zealand Bankers’ Association chief executive Roger Beaumont said New Zealand banks were strong.
‘‘There’s a couple of reasons for that. They are well capitalised and they’re very good at managing their costs, which makes them very efficient and helps explain their returns on equity.
‘‘New Zealand’s banks are well equipped to handle a significant economic crisis. Our banks have come through Reserve Bank stress tests with flying colours. They test the banks’ resilience against negative economic scenarios. For example, they show our banks could handle a 40 per cent drop in the housing market. In a real life test they came through the global financial crisis without any failures or bail outs, unlike banks in other countries.’’