Banks continue record run of profits

MEDIA RELEASE – 7th May 2014

FIPS December 2013 quarterly analysis

Banks continue record run of profits

Embargoed until 6.00am Wednesday 7th May 2014

New Zealand banks are continuing their run of record profits – dispelling recent market concerns about the Official Cash Rate (OCR) increase, and the impact of the LVR housing rules.

KPMG New Zealand’s latest Financial Institutions Performance Survey (FIPS)shows the banks’ collective loan book has continued to grow – with a 16.86% increase in profits over the previous quarter.

John Kensington, KPMG Head of Financial Services, says the strong performance of the banks goes hand-in-hand with the more buoyant outlook from Kiwi businesses.

“We’re at the stage now where every quarter is a record quarter. The banks are benefitting from the general headwind in the New Zealand economy as dairy, agriculture and other aspects of the economy are starting to do well. All that growth and development comes about because the banks are funding it.”

Results of the March quarterly report provide reassurance to the market, given the New Zealand economy has come under criticism recently. In February, Standard and Poor’s expressed concerns about risks within the New Zealand market; while US economist Jesse Colombo warned the country was facing a housing bubble.

John Kensington says while those concerns are based on legitimate theories, they do not take into account the realities of the New Zealand environment. He argues there are some “subtle differences” in our market.

“We have a lack of housing supply in New Zealand, which is driving prices up. That’s different to other countries where the housing market crashed, like Ireland and the US. They built housing to create jobs, and there wasn’t enough demand. There are whole tracts of land locked up in those countries where the owners have walked away, and the banks don’t pursue them.”

“The other difference is that our Reserve Bank has recognised there is a bubble, and is taking measures to pull it back. A bubble is only a problem if it bursts.”

The latest FIPS report wasn’t all good news for the banks, however. The pace of regulation continues to grow - with the introduction of the Financial Market Conduct Act 2013 and the Financial Reporting Act 2013, both which came into effect on April 1 2014.

John Kensington says the new legislation will add further complexity to a sector that’s already struggling under the weight of regulation.

“At a time when banks are in a position to lend more, they are still being hamstrung by a multitude of regulation,” he says.

“We know that banks would love to invest in frontline staff for revenue-generating roles like lending, insurance and private banking. But the reality is they’re having to devote more resources to cope with the increasing levels of compliance and reporting.”

Key findings from the KPMG FIPS Survey December 2013 include:

The total net profit for all survey participants over the December quarter was $1.1 billion, a 16.86% increase over the prior quarter.

The increase in non-interest income of $143m was largely due to favourable fair value movements for ANZ and BNZ, and a gain on the sale of overseas equity securities for Westpac.

Total assets grew to an all-time quarterly high at $380.9 billion, driven by the continued increase in gross loans and advances ($3.7 billion increase for the quarter).

FIPS December 2013 review

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