New Zealand's registered banks managed to lift their net interest income in 2013, in spite of intense competition in the residential mortgage market, as wholesale funding costs fell and banks eased off chasing retail deposits.
Banks registered with the Reserve Bank recorded a combined 2.7 percent, or $219 million increase in net interest income in the 12 months ended Sept. 30, according to KPMG's latest Financial Institutions Performance Survey. They managed that growth even as their net interest margin held unchanged at 2.26 percent.
Profit growth slowed to 8.6 percent across the banking industry last year, helped by a 4.35 percent increase in lending assets, from 14 percent profit growth in 2012.
"To get net interest income up you have to increase margin or volume," said John Kensington, KPMG head of financial services. "This year it is really around loan growth. People want to borrow again."
The 2013 year follows a "brutal deposit war" in 2012 driven by the Reserve Bank's requirement for lenders to increase their core funding ratio (CFR) to 75 percent as at Jan. 1, 2013.
That CFR target was exceeded last year, standing at 85 percent for the sector last November, which is up from the 65 percent level of 2008. As a result, banks were able to trim interest rates on deposits last year, which helped drive down funding costs.
At the same time, wholesale funding costs fell back toward levels last seen before the global financial crisis.
Growth in lending was helped by "the tailwinds of the New Zealand economy," including rising payouts to dairy farmers, Kensington said.
Amid signs of a strengthening economy, banks' impaired asset expense to average gross loans and advances shrank for the fourth straight year to just 0.16 percent in 2013, the lowest since 2007, when it was at 0.1 percent. The ratio jumped to 0.76 percent in 2009 as the GFC dried up credit markets and asset values fell.
Most banks "worked hard to improve their profitability, achieving this through a combination of margin retention, a drop in the cost of funds, improved credit quality and pressing on with cost reduction initiatives in their organisations," Kensington said.
Operating expenses fell a combined 2.85 percent, or $153 million and as a ratio of operating income they fell to 42.3 percent, the lowest in at least a decade.
Return on assets improved marginally to 1 percent from 0.93 percent and return on equity was little changed at 14.21 percent.
That compares with ROA and ROE of 6.56 percent and 15.05 percent respectively for the NZX top 10 companies, KPMG said.
The Reserve Bank's core funding ratio requirements "will put further pressure on (those ratios) over time," it said.
ANZ Bank New Zealand was the biggest New Zealand incorporated bank, with assets of $117 billion and achieved a profit of $1.37 billion last year, almost double that of nearest rival Westpac New Zealand.
Of New Zealand branch banks, Westpac Banking Corp was biggest with $14.48 billion of assets, followed by ANZ Banking Group on $9.7 billion.
"For our banks, the feeling is if markets − global markets particularly − don't have an upset, the
funding costs will remain suppressed and this will help them retain their margins in 2014," Kensington said
Finance companies as a group increased net interest income by 3.2 percent, or $18.9 million while operating expenses jumped 28.5 percent, or $109.5 million, though this mainly related to a legal settlement by GE Capital. The market is dominated by just two firms, GE Capital and UDC Finance, which have more than 50 percent of the sector's assets.