Banks claw back profits – 45% growth in last quarter

Bank profits rose 45% in the last three months, clawing back steep reductions in the previous quarter.

Net profit for the three months to June rose $282 million, or 44.6%, to $914 million, a survey of the country’s eight largest banks reveals.

That compares to net profits of $632 million in the three months to March 31, where they had almost halved from $1.148 billion.

The KPMG Financial Institutions Performance Survey for the June quarter traces the profit surge to ANZ and BNZ banks, where net profits rose  $150 million and $113 million, respectively.

The low base profit in the March quarter was largely because of losses on trading securities and derivative financial instruments, so the reversal in the last quarter highlights the impact of market volatility on the banks’ quarterly earnings.

Bank assets grew 2.3% to $370 billion, with the increase largely driven by ANZ and Westpac.

ANZ, the country's largest bank, increased gross loans and advances by more than any of its competitors during the quarter.

The 1.26% growth in ANZ's gross loans and advances was topped only by its smaller rival The Cooperative Bank.

The FIPS survey records the data from ANZ, Bank of New Zealand, Commonwealth Bank of Australia, Kiwibank, Southland Building Society, The Co-operative Bank, TSB Bank and Westpac Banking Corporation.

Chief executive of the New Zealand Bankers’ Association Kirk Hope says the survey confirms the country’s banks are well placed to meet the ongoing challenge of the European debt crisis and a slowdown in the Australian economy.

“The banking sector’s core funding ratio is at 84.3%, well above the Reserve Bank’s current minimum ratio of 70%. That means banks are sourcing more funds from domestic savings and longer term wholesale funds, and are less reliant on shorter term overseas funding.

“On top of this, our banks are set to meet the Reserve Bank’s new minimum level of capital they must hold, which is based on the Basel III international standards.” 

Large profits in the banking sector  needed to be considered alongside the contribution banks made to the economy, Mr Hope says.

"Last year banks contributed around $6 billion to our economy through the $4.5 billion they invest in running their businesses here, and the $1.3 billion they paid in tax."

Competition intense as interest rate margins decrease 

Bank average interest rate margins fell  by 6 basis points to 2.25% during the quarter, indicating competition among banks is strong.

The largest decreases in interest margin were seen by ASB Bank’s parent company the Commonwealth Bank of Australia, at 14 basis points, with BNZ at 10 and ANZ at 9.

Bucking the trend was Kiwibank, which increased its interest margin, for the fourth consecutive quarter, by 9 basis points to 1.89%.

With the Reserve Bank likely to hold the official cash rate flat at 2.5% until the middle of next year, there has not been a lot of movement in market interest rates, notes to the FIPS survey say.

“However, intense competition amongst the banks for quality customers is a potential factor for the sector’s decrease in interest margin for the quarter, which after a period of a year or two with asset competition being flat and the main competition being on funding, this might be the early signs of a return to the behaviour of the 2003-07 period.”

Reserve Bank data indicates home owners are starting to switch from floating to fixed mortgage rates as the one- and two-year rates are now being offered at rates below floating rates.

“During the quarter the percentage of New Zealand household lending on floating rages have decreased by 2.64% and one- and two-year rates have increased by 3.33 %,” the survey says.

The shift off fixed rates is likely to have an impact on margins as banks traditionally earn a higher margin on floating rate based lending products.