Banks set to stay profitable in face of increasing competition, Moody's says

New Zealand's banks should be able to maintain their strong levels of profitability, even as mounting competition puts pressure on their margins, according to ratings agency Moody's Investors Service.

The nation's banking system is stable, based on sustained growth expectations for the economy, and the relatively low level of bad loans on lenders' books, Moody's said in a report. Lower funding costs will help lender preserve their profits, even as the central bank increases interest rates and borrowers switch to fixed-rate loans, which typically have thinner margins for banks, it said. Lenders are also expected to benefit from lower costs to provide for impaired loans, and operating efficiencies.

"The banks' profitability metrics have likely peaked and may experience some marginal downward pressure in the coming 12 to 18 months," the report said. "Nonetheless, the industry's concentrated structure is likely to keep profitability at healthy levels."

In May, the Reserve Bank's twice-yearly financial stability report found that bank profitability was back to pre-global financial crisis levels, largely due to the fall in impairment charges, and future earnings would "likely be influenced by how borrowers respond to the outlook for higher domestic interest rates."

The ratings company expects the big four banks - ANZ Bank New Zealand, Westpac Banking Corp, ASB Bank, and Bank of New Zealand - to continue their domination of the local market, accounting for about 88 pecent of all loans and 97 percent of deposits, as at March 31.

While that dominance supported the lenders' pricing power, competitive pressures will come from capital requirements driving demand for customer deposits, rising interest rates encouraging customers to switch to fixed-term mortgages, and banks not passing on interest rate increases to their customers.

Moody's today said funding conditions will likely stay favourable for New Zealand banks, with deposit growth likely to keep outstripping loan growth, albeit at a slowing pace.

The ratings company said the four Australian-owned banks benefited from support from their parents, while state-owned KiwiBank's benefited from the guarantee from parent New Zealand Post.

(BusinessDesk)