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Gigantic hit for banking profits

New Zealand's bank sector saw net profit knocked back a startling 90% last year, KPMG's annual banking survey reveals.The Financial Institutions Performance Survey, released today, records the combined net profit of the country's 19 registered banks at $2

Georgina Bond and NZPA
Tue, 27 Apr 2010

New Zealand’s bank sector saw net profit knocked back a startling 90% last year, KPMG’s annual banking survey reveals.

The Financial Institutions Performance Survey, released today, records the combined net profit of the country’s 19 registered banks at $299 million for the year to December 2009, down from $3.07 billion the year earlier.

Stripping out abnormal items and tax, underlying profits for the sector were recorded as $3.2 million, compared with $4.4 billion in 2008.

Ballooning impairment expenses were the main reason for the decrease. KPMG said the 244% rise in loan losses to $2.3 billion was due to deteriorating asset quality, driven by recessionary economic conditions, suppressed property prices and low business confidence.

Profits of the major, foreign-owned banks were also swallowed up by structured finance’ tax settlements with the IRD.

However, the impact was not reflected in ASB’s result as it recorded its tax provisions in its first quarter results of the 2010 year.

KPMG’s Financial Institutions Performance Survey records registered banks, major finance companies and savings institutions for the period between January 1 2009 to December 31, 2009.

All four major banks saw profits decrease over the year.

The survey ranked ASB Bank as the biggest earner with a net profit of $379 million for the year to December 31 compared to $490 million the previous year.

This was followed by ANZ with a net profit of $194 million; BNZ with a net loss of $181 million and Westpac with a net loss of $494 million.

Local banks, which were not affected by the structured finance payments, did not share the big losses.

Kiwibank saw net profits rise to $64 million from $37 million the year earlier and TSB saw net profit rise to $43 million from $39 million.

KPMG said 2009 provided the most difficult market conditions for the banking and finance sector in many years and banks had weathered the financial storm of 2008 and 2009 well.

But they faced a low-growth environment for the medium term and it was a period of adjustment as reweighed funding towards retail deposits and responded to new regulation from the Reserve Bank.

The focus on securing retail deposits was a constraint and continued to put pressure on cost of funds and interest margins for all financial institutions.

The Reserve Bank also introduced new rules during the last year requiring banks to hold more in reserve than they previously did, curbing their ability to pursue aggressive growth.

Registered banks' underlying profit

                          2009        2008
ANZ                 827          1320
BNZ                685            1072
ASB                580            672
Kiwibank         88              59
TSB                   61            59
Westpac            595         958

The banks now face a series of constraints as they seek to move ahead following the global financial crisis, the  survey says.

The banking and finance sector was faced in 2009 with the most difficult market conditions for many years, and for some probably the most difficult challenges ever faced, the survey report says.

Having ridden out the storm that was much of 2008 and 2009, the banks could look forward but there were constraints and disciplines to operating in the current environment.

The first constraint was a low growth environment for the medium term. Banks would have little opportunity to ease credit standards and growth could only be targeted in the performing sectors of the economy, the report says.

Secondly, the major banks' focus on securing retail deposits was not going to change in the short term, continuing the pressure on cost of funds for all financial institutions.

A third constraint was the regulatory settings in terms of the Reserve Bank's liquidity policy and asset risk weightings for capital adequacy purposes, the report said.

The 2009 results were damaged by the major banks settling long running tax disputes, and major loan losses equal to the aggregate loan losses of the preceding seven years.

Essentially the global financial crisis stressed New Zealand banks from mid-2008 to the third quarter of 2009, where there was difficulty sourcing offshore funds particularly at reasonable pricing, the report said.

The reaction had been to go to the domestic retail market to obtain a greater proportion of funding for balance sheets.

The result had been the major banks competing on price to secure retail deposits. That had seen interest rates push up across the curve but particularly between six and 18 months as the banks sought to extend the average term of their deposit book.

Considerable upward pressure was being put on the cost of funds, with the banks forced to recover increased funding costs from lending customers, the report said.

"This is evident in the progressive increase in mortgage margins and repricing generally."

The risk management decisions taken by the banks had been reinforced by the Reserve Bank introducing its new liquidity policy.

That policy redefined the structural composition of bank balance sheets, and would encourage holding greater amounts of liquid assets and for a larger portion of the balance sheet to comprise deposits originating from retail sources, or from wholesale sources with maturity terms greater than 12 months, the report said.

At the same time, the banks were experiencing a general reluctance on the part of many customers to take on new debt, but KPMG said it expected there would be a modest net rise in registered bank lending in 2010.

A particular concern was the rural sector, given its importance to New Zealand and the number of non-performing loans in the sector, the report said.

Banks were making a concerted effort to ensure a systemic issue was not entrenched by one or more banks taking a hard line on their exposures and forcing farm sales which would have an across the board impact on farm values.

Rather, the banks were looking to work through the issues with farmers and there had been considerable refinance activity.

As a result relatively few farms were sold during the past six to nine months. Despite that, farm values had fallen probably by more than 10 percent, and potentially significantly more in distressed areas.

Georgina Bond and NZPA
Tue, 27 Apr 2010
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Gigantic hit for banking profits