Profits bounce despite pessimism
A leap in profits shows New Zealand banks may have been too pessimistic in their expectations for what the Covid-19 pandemic would do to their balance sheets.
Westpac this week reported a 98 per cent profit bounce year on year as it pared back its provision for bad loans.
Now, a new Financial Institutions Performance Survey from KPMG shows the sector as a whole performed more strongly than expected in the quarter ended in December last year.
Banks made $1.351 billion in the quarter, up 35.11 per cent on the previous three months.
‘‘Much of the improvement stems from lower impairment charges – or, in some cases, reversals – in the quarter, reflecting how the current credit quality of lenders’ books is significantly better than where they were predicted to be,’’ John Kensington, KPMG’s head of banking and finance, said.
Government support packages had a huge impact, which had been understated when the first predictions were made about how the pandemic would affect banks, he said.
But the financial resilience of most New Zealanders has been much stronger than anticipated
this time last year. The banks’ reduction in operating costs of $84.1 million – probably a result of increased working from home and a focus on essential services – also contributed to this increase in profits.
He said the banks had been too pessimistic last year. When borders closed and countries around the world went into lockdown, it was hard to gauge the extent of the impact, he said.
But the outlook now was still uncertain, he said.
The vaccine rollout could be a success, supply chains could be fixed, and the world could embark on the biggest boom ever.
Alternatively, the vaccine might only be effective for a year and there could be more supplychain disruptions and lockdowns in another year, prompting wobbling economies to fail.
So far the signs were positive, but Kensington said it was likely that the pandemic would be a topic of discussion for years to come.
Lending was up 1.78 per cent from the previous quarter to $447.05b in the quarter.
October, November and December each marked new highs for monthly mortgage lending in 2020, with the overall trend tracking up after a drop in April.
Just under $10b in loans were written in December alone, 48 per cent and 80 per cent higher than December 2019 and December 2018 respectively.
‘‘The housing market is a double-edged sword,’’ Kensington said ‘‘No doubt its consistent climb has helped support confidence, but when the regulator, banks and the Government all look at tools to slow it further I think we can all agree it is in undesirable territory at present.’’
All the major banks reported loan growth over the 12-month period ended in December 2020, with locally owned Kiwibank outperforming the pack and growing by almost 11 per cent.
New Zealand recorded its first $10b mortgage month in March.
Kensington said that when the big four banks all moved to increase loan-to-value ratio restrictions on investors even before the Reserve Bank required it, the Government introduced changes to the interest offsetting rules, and the minister of finance sought powers over lending restrictions, it was an indication of concern about the market.
He said there was probably more to come for the housing sector. While the Government would not want it to collapse, it wanted price rises to slow. ‘‘We’ve got a very excited market.’’
A decision about a possible sale of Westpac by its Australian parent company is likely within two to three months, after Westpac said in March that it was considering a ‘‘demerger’’ of its New Zealand business. Kensington said any good business should be constantly reviewing where it put its resource.