Profit squeeze be­hind banks’ re­treat

The Press - - Business - SUSAN EDMUNDS

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.’’

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