Bank loan books hit fresh high of $228b but margins squeezed

The size of the mortgage books of New Zealand's banks hit a new high of $227.7 billion in the three months ended March 31, an increase of $8.4 billion or 3.9% on the previous quarter.

The figures, from KPMG's Financial Institutions Performance Survey, come despite bank margins being squeezed by the fierce battle for home loans, with just Bank of New Zealand able to maintain its lending margin of 2.21% in the quarter. BNZ had a particularly strong three months. Its mortgage book showed the fastest growth, at 2.24% or $1.57 billion and it reported the largest fall in funding costs, down 30 basis points.

The report says BNZ's success is being put down to its re-entry into the broker market and the expansion of its mobile mortgage workforce.

Author John Kensington said BNZ had also been focusing on profitability. "Previously it did a bit of volume at lower margins. I think it has stopped doing that. I think it has just really tightened up its game."

Industrywide, margins on lending fell to 2.17% from 2.21% in the December quarter. Margins have now fallen by 14 basis points since the 2.31% reported in the June 2015 quarter. Kiwibank saw the largest drop in its margin, down nine basis points to 1.98%, followed by Westpac Banking Corp, which fell 6 basis points to 2.11%.

All banks reported that their funding costs had fallen, with the average liability now 3.21% in the March quarter, down from 3.5% in the December quarter, mainly driven by the lower rates on offer to savers and depositors.

Mr Kensington said concerns were starting to emerge about deposits flowing away from savings accounts as term accounts mature.

"Anecdotally as deposits come due, they're not being redeposited, some are being transferred into funds, but a lot of it is being used to buy real estate," he said. "There's a very real concern that the banking system cannot go on funding mortgages on one side of its book unless there are deposits."

Homeowners and buyers are increasingly adopting one-year mortgages, with 39.75% of home loans in the quarter being for a term of just 12 months. The Reserve Bank is expected to cut the official cash rate further in August from its current record low of 2.25%. Two-year fixed mortgages made up 26.47% of the market while floating rates made up 23.17%.

All the banks reported their loan books had increased, with gross loan and advances increasing by $6.6 billion in the quarter. That reflects a property market running hot in Auckland and regional markets such as Hamilton and Tauranga.

Heartland Bank, which focuses on business, rural, and auto lending, achieved the highest growth rate of any of the banks, at 3.02% or $89 million. Despite reporting the highest funding costs, at 3.95%, it also reported a margin of 4.58%. That compares to 1.98% at Kiwibank and 2.61% at Southland Building Society and Cooperative Bank.

New Zealand's banks saw profits rise by just under 8% in the three months to the end of March 2016, rising to $1.2 billion from $1.11 billion in the previous quarter, although this mainly reflects the revaluation of assets and derivatives.

Since the period covered in the FIPS report, the Reserve Bank has proposed a minimum deposit of 40% for loans to property investors across New Zealand in a bid to tackle the booming market. Last week David Hisco, the chief executive of ANZ Bank New Zealand, the country's largest lender, argued the bank should have gone further and increased it to 60%.

Mr Kensington praised Mr Hisco's contribution to the debate, saying "I think he's bringing probably the most balanced view to it. This is everybody's problem. It's town planners, it's builders, it's council's, it's the government. And I think everybody has got a bit of a wake-up call."

(BusinessDesk)

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