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  • Date: 27/02/2014

For more information on FIPS 2013

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Brett Cammell
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Banks show real growth after long adjustment 

FIPS 2013 reveal banks show real growth after long adjustment:

 

The latest release of our banking survey shows that yet again in 2013, the banks have enjoyed a very profitable year and a very strong year.  I think the reason for this is the NZ economy has rebounded, slightly.  We thought we had green shoots in 2010 and 2011 but didn’t.  2012 saw some growth but 2013 is when the growth really took off, right through the economy.

 

The biggest driver is confidence. People are now confident, they’ve recovered from the GFC and they have a willingness to go back out into business and borrow and expand their businesses.

 

The banks have benefitted from being able to maintain their margins, grow their loan books.

They’ve also benefitted greatly from the deposit war that occurred in 2012, didn’t occur to anywhere near the same extent in 2013.  And they’ve enjoyed once again, improved credit quality and less credit losses. 

 

When you look at all of that, plus the fact that the New Zealand economy is picking up, that is why the banks have had a very strong year in 2013.

 

But it’s not all sunshine there is the odd cloud in the horizon.

 

If you listen to the ratings agency, they would say it’s a black cloud, with concerns about a soft landing in China and the rest of Asia, housing bubble, high commodity prices and where the dollar is currently parked and OCR increases in the future.  But I’d like to look at these more as being, grey clouds that are moving away from us, as opposed to black clouds moving towards us.

 

So all in all, there will be some challenges in the future for the banks in the upcoming year but things are still looking reasonably positive.

New Zealand’s banking sector had a solid 2013, with economic recovery picking up pace and beginning to show through in the results.

Profits rose 8.61% across the banking industry in 2013, with an increase in lending assets of 4.35%. Return on assets recovered to 1.0%, now sitting just below the level last seen before the global financial crisis (GFC).

 

Return on equity remains at 14.21%, similar with 2012. Crucial to the post-GFC adjustment, impaired asset expenses dropped $153 million from $659 million in 2012 to $506 million  a decrease of 23.21%. This is now the fourth consecutive year impaired asset expenses have declined.

 

“There are strong, green shoots emerging now,” says KPMG head of financial services John Kensington.

 

"Our banks saw real loan growth on their balance sheets in 2013. Most worked hard to improve their profitability, achieving this through a combination of margin retention, a drop in the cost of funds, improved credit quality and pressing on with cost reduction initiatives in their organisations.

 

"Shielding these 'green shoots' from the frost of regulatory reform is likely a challenge for 2014. The Reserve Bank's restrictions on high LVR lending, anti-money laundering legislation coming on-stream and Foreign Account Tax Compliance Act (FATCA) reporting have all proved burdensome for our banks in 2013.

 

“In addition the change from floating to fixed mortgages and competition across the sector will be a challenge.”

 

Within the sector, competition intensified over 2013, as banks competed harder for ‘good customers’. This is set against a backdrop of historically low interest rates and the anticipation that these low rates will soon end.

 

Strong growth in retail deposits indicates that banks are less reliant on the wholesale debt markets as they look for more stable sources of funding.

 

The themes of the year was certainly the adjustment to the Reserve Bank’s new loan-to-value ratio (LVR) rules, an adjustment which has been long and involved for both banks and customers.

 

“Before the LVR rule change the banks were probably writing 20 to 30 percent of their mortgages a month with a greater than 80 percent LVR, now, they’re probably writing 4 to 6 percent of them with a greater than 80 percent LVR. In short, there’s going to be spirited competition for anyone who’s a good loan, be it a household mortgage or a corporate. "

 

“For our banks, the feeling is if markets - global markets particularly - don’t have an upset, the funding costs will remain suppressed and this will help them retain their margins in 2014.”

 

To find out more about FIPS go to kpmg.com/nz/fips2013

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