Covid-19 makes $1.6b hole in bank profits

Covid-19 has slashed bank profits – but how quickly they recover will depend on the strength of the wider economy, KPMG says.

The accounting firm has released its latest Financial Institutions Performance Survey, which shows that the New Zealand banks’ combined profits dropped in 2020 by the largest amount in 10 years.

Bank profits were down $1.58 billion in the year, or 27.57 per cent, to $4.14b.

It is a bigger profit hit than suffered in the immediate aftermath of the global financial crisis. Then, profits slipped 1.2 per cent in 2007 and 0.1 per cent in 2008 before plummeting 98.8 per cent the following year.

KPMG head of banking and finance John Kensington said banks would have been braced for a Covid-19 effect on their profits.

Like many sectors, banking had not suffered as big a pandemic blow as had been feared.

‘‘The difference between now and the GFC is that there has been enormous government support and banks are now part of the solution – working together with the Government to help customers get through the pandemic.’’

The biggest concern was the level of uncertainty about the direction of the economy, he said.

There was a range of factors at play, such as the vaccine rollout and reopening of the borders. Supply chain issues could become a headache if they lingered.

‘‘New Zealand is in as good a position as any to ride out the pandemic.’’

Mortgage lending grew almost 7 per cent over the year, although a 5 per cent reduction in business lending reduced the overall rate of lending growth to 3 per cent.

Kensington said the banks had been responsible in their lending.

Some had brought in loan-tovalue restrictions before the Reserve Bank required them.

Kensington said it seemed likely pressure would continue in the mortgage market as house prices continued to rise.

People were returning to New Zealand and looking for a place to settle, he said, capital gains made property an attractive investment and the low cost of servicing a mortgage made it cheaper for some people to buy than rent. On top of that was a fear of missing out.

It is a bigger profit hit than suffered in the immediate aftermath of the global financial crisis.