Challenging market conditions drive drop in bank profits

Media Release

Challenging market conditions drive 6.46% drop in bank profits

Embargoed until 5:00am, 16 February 2017

After achieving an all-time record profit of $5.17 billion in 2015, KPMG’s Financial Institutions Performance Survey (FIPS) reveals New Zealand banks’ profits decreased slightly in 2016. As banks managed challenging market conditions, net profit after tax (NPAT) reduced 6.46% to $4.84 billion.

John Kensington, Head of Banking & Finance, says the profit decrease is the result of growing competition which is tightening margins, primarily caused by volatility in global markets making funding more difficult and expensive, rising loan impairments and increased operating expenses.

“Midway through the year we saw an acceleration in lending growth to an eight-year high of 8.10%, while at the same time banks have had to manage decreasing domestic deposits and increasing offshore funding costs.

“This is undoubtedly squeezing margins and means homeowners need to be prepared that there is little likelihood a low OCR 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,” says Kensington.

Beyond filling the growing funding gap, Kensington also commented that banks have three areas of focus in 2017 – further digitisation of bank services, managing regulatory pressures and the importance of conduct risk.

“Investment in technology and digital capabilities will remain critical in 2017 and beyond. We’ve seen most of the banks innovate in this area to an extent, but to truly counteract the threat of market disruptors and improve customer experience this needs to continue.

“Expect to see more partnerships between banks and existing technology companies in this Fintech space with the most likely area being payments,” says Kensington.

Unsurprisingly, survey participants were not fond of increasing regulation for the banking industry. The survey showed the Reserve Bank’s outsourcing policy, which looks to compell banks to return back office functions to New Zealand and was initially estimated to cost between $10 to $400 million to implement, is of particular focus.

“While banks are focussing on regulation, our survey identified conduct risk as an area of concern. Most executives we spoke to were, however, surprisingly confident that their organisation was on top of conduct risk. However, looking back at the list of issues in the industry over the past year this confidence was surprising,” says Kensington.

KPMG’s Financial Institutions Performance Survey (FIPS) covered 21 of New Zealand’s banks, and analysed the sector’s performance in 2016.

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