NZ bank margins at nine-year high in 2015

New Zealand's banks fattened their interest margins to the widest in nine years as property and agricultural lending bolstered their incomes, a trend that could continue this year as low interest rates keep a lid on funding costs.

Banks registered with the Reserve Bank widened net interest margins an average of four basis points to 2.28% in 2015, the widest since 2006, according to KPMG's financial institutions performance survey (FIPS). Net interest income climbed 8.5%, outpacing the 7.2% expansion of net loans to $365 billion, which KPMG said was due to increased property and agricultural lending. Net profit across the banks was up 6.9% to $5.17 billion.

"Overall, the banking sector continues to be in a strong position, with another record profit year fuelled by strengthened interest margins on the back of lending growth, well-managed operating costs, low-cost funding and plenty of liquidity contributing to improved results," KPMG said. "Positive trends for interest margins could continue through 2016 if the current economic climate prevails and banks continue to enjoy reduced funding costs."

Local banks have increased their lending every year since 2011, and been boosting profits since 2010 after coming through the global financial crisis and New Zealand's earlier finance sector collapse largely unscathed, and as record low interest rates keep a lid on their funding costs.

The FIPS report cites the low official cash rate and the prospect for further easing this year as providing an opportunity for funding costs to remain cheap though uncertainty in global financial markets could push up wholesale funding costs, which a number of lenders rely on.

Last November, the Reserve Bank's six-monthly check-up on the health of the financial system found it to be in good stead while noting the risks posed by the buoyant Auckland housing market and weak dairy prices.

Local financial institutions' impaired asset expense climbed 65% to $438 million in 2015, and the impaired asset expense to gross loan ratio widened four basis points to 0.12%.

"The potential risks to asset quality mainly arising from dairy, property, and global uncertainties are mitigated to an extent by the relative stability of the local economy with reported strong employment, tourism, consumer and business confidence," the report said.

As margins improved for the banks, non-bank lenders faced skinnier margins in 2015, shrinking an average 32 basis points to 6.62% in the face of heightened competition, and as peer-to-peer lenders siphoned off some of their customers. Non-banks' gross loans grew 6.6% to $9.79 billion while sector profits shrank 6.7% to $254.6 million.

"In an industry that continues to present good growth opportunities, the risks of margin pressure and overcrowding poses continuing concerns as participants all commented on the importance of positioning themselves in their area of expertise in order to strategically stay ahead of the competition," KPMG said.

(BusinessDesk)