NZ banking sector faces an uncertain journey in 2011: KPMG

Media Release

3 May 2011

NZ banking sector faces an uncertain journey in 2011: KPMG

New Zealand’s banking sector posted a return to profitability in 2010, the KPMG Financial Institutions Performance Survey 2010 shows.

But banks face an uncertain journey to reach safer ground this year, warns John Kensington, KPMG Acting Head of Financial Services.

“Four factors are weighing heavily on the sector: deleveraging, rural sector debt, general economic uncertainty and the unknown impact of the two Christchurch earthquakes,” comments Mr Kensington.

Compounding this uncertainty is the impact of regulatory pressures, particularly the anti-money laundering legislation, financial services regulation and core funding requirements, he says.

“Deleveraging was the big story of 2010,” he says. “Market participants were surprised at the scale of deleveraging. Households were reducing debt over a long period of time and the deleveraging is multifaceted and occurring at almost every level of the loan book.

“As a result, all of the banks struggled to write new business and meet volume and dollar targets,” Mr Kensington says. “Uncertain economic conditions, the softness of the recovery, and deleveraging means banks will continue to work hard to grow their loan book in the near-term.”

At the same time, banks’ revenue channels are under pressure. “Net interest margins are again being squeezed, a result of the retail deposit wars of the first half of last year,” explains Mr Kensington. “The impact was more pronounced on the big five banks, who lost 10 basis points and saw their margins reduced to 2.09% last year.”

But Mr Kensington notes that banks are actively managing their rural assets, rather than forcing a sale in the current market. Despite high commodity prices, it will still take many years for the sector to reduce debt to a level deemed satisfactory to its lenders, or the RBNZ.

The Reserve Bank is considering a capital overlay because of concerns at the level of rural debt, which remains at around $47 billion despite many in the sector reducing their exposure.

Mr Kensington says the biggest uncertainty on the path to recovery for the banking sector, is the as-yet unquantifiable impact of the Christchurch earthquakes.

“All of the banks will suffer some losses, although these have yet to be determined,” he says.

The bigger impact will be the residual effects on the regional and national economies, further delaying recovery and compounding banks’ weak lending growth in the coming year.

All of these elements – deleveraging, high rural debt, stagnant growth, regulation and the Christchurch effect – are still in play and create an environment in which it is challenging for the banks to navigate a path to safer ground.

ENDS

Note to Editors

Copies of the FIPS graphs and charts can be obtained from kpmg.com/NZ/en/IssuesAndInsights/ArticlesPublications/FIPS/tables

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