Speaking at the launch of the 2010 KPMG Financial Services Performance Survey (FIPS), Head of Financial Services, Godfrey Boyce said, “Having ridden through the storm the New Zealand banking sector is now ready to get back into the water, and they will be safe as long as they ‘swim between the flags’. Essentially this means that while the banks are now able to move forward, they must be conscious of the disciplines required in the current environment.”
He said that the current operating environment demands both effective risk management skills and customer relationship skills.
“Risk management skills are essential to identify and understand risk and ensure the organisation makes the appropriate risk and return decisions; and customer relationship skills to identify and grow profitable customer business in the performing parts of the economy.”
Mr Boyce stated that there are three main constraints financial institutions need to respond to.
- A low growth environment resulting from a slower and more patchy recovery.
- The major banks’ focus on securing retail deposits is not going to change in the short term and will continue to put pressure on the cost of funds and accordingly margins for all financial institutions.
- Regulatory structures such as the Reserve Bank of New Zealand’s liquidity policy and asset risk weightings for capital adequacy purposes put limits on the ability to pursue aggressive growth.
“These constraints will focus the banks on the discipline of maximising returns from the equity invested in their businesses. We expect there to be a renewed focus on the allocation of economic capital and measuring return on economic capital. New transactions will need to meet the hurdle rates of return determined for each type of business before they can be entered into. However, this will be within a wider operational environment where the banks have less appetite for risky transactions.”
This follows a year in which the aggregate net profit after tax of the registered banks sector fell 90% to only $300 million. This profit represents a return on equity of only 1.5%. The 2009 results were decimated by the major banks settling their long running tax disputes with the IRD and major loan losses equal to the aggregate loan losses of the preceding seven years.
The key findings from the survey of the registered banks 2009 financial results are:
- underlying profit down 26% to $3.2 billion
- a 244% increase in loan losses to $2.2 billion reflecting deteriorating asset quality – driven by recessionary economic conditions, suppressed property prices and low business confidence
- low loan growth of 2.7% resulting from prudent and risk adverse lending behaviour; and
- net interest margins stabilised 3 basis points higher at 2.10% in 2009 reflecting a recovery in the lending and mortgage interest margin since 2008 largely offset by intensified competition and interest rate increases in the funding books.
Since September 2009 interest margins have been under significant pressure from the increasing cost of retail deposits.
Today’s economic environment and market place is unfamiliar for banks and presents new challenges. These challenges fundamentally impact the non-bank sector and increase the pressure on many of these businesses.
Ends
For further information contact:
Sneha Paul, KPMG Communications, 021 243 8997 or snehapaul@kpmg.co.nz