Profit squeeze behind banks’ retreat
Bank customers are being told not to expect many more tantalising interest rate specials or tempting cash offers, as banks pull back and rebalance after a period of intense competition for mortgages.
KPMG’s latest Financial Institutions Performance Survey shows that for the first time in seven years, New Zealand banks recorded a drop in profitability compared with the year before.
The banks pulled in $4.84 billion in combined profit in 2016, down $334 million on 2015. The margin they make on lending dropped from 2.28 per cent to 2.15 per cent over the same period.
John Kensington, head of banking and finance at KPMG, said the profit drop was the result of fierce competition over the year.
Banks had to pay more for their own funding as volatility in global markets made finding money overseas more difficult and expensive. They were forced to turn to overseas sources because of a lack of domestic deposits.
Competition was especially strong in the first half of 2016. Lending growth hit an eight-year high of 8.1 per cent even as banks struggled to attract domestic deposits. The report said even some bank executives questioned the ferocity lenders displayed in pursuing deals.
‘‘In some cases executives were left to wonder if any profit was being made on such deals, and if such deals were only being made in the interest of retaining market share, retaining a key customer or for some other reason.’’
But in the second half of the year, the banks noticeably started to pull back on their lending, which the report said was driven by the higher cost of funding for the banks, regulation limiting the funding Australian parent banks can give their New Zealand subsidiaries, and concern about an overheated property market.
Kensington said a good example of this was the response to the Reserve Bank’s announcement that it intended to introduce a 60 per cent loan-to-value restriction for property investors. Within 48 hours the four major banks and Kiwibank adopted the rule voluntarily.
The new, tighter conditions were unlikely to change in the near future, Kensington said.
‘‘Homeowners need to be prepared that there is little likelihood a low OCR [official cash rate] will be passed on to mortgagors.
‘‘If the OCR is cut, banks have already indicated they will likely use any cut to buffer margins or to pass on to domestic depositors, as a way to address the mismatch between borrowing and deposits.
‘‘In other words, don’t expect mortgage interest rates to decrease any time soon. Some banks speculate the reduction in domestic deposits may be caused in part by the growing popularity of KiwiSaver and other forms of investment. But, irrespective of the cause, the record level of borrowing last year can’t continue without deposits to back it up.’’