18 Jul 2018

Bank profits under pressure as asset quality declines

8:43 am on 18 July 2018

The record run of growth in banking profits has come to an end as they fell to the pressure of higher bad debts and operating costs and a squeeze on margins.

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Photo: Creative Commons / Pixabay / 3dman_eu

KPMG's Financial Institution Performance Survey shows the net profit of the country's banks fell 11.3 percent or $1.2 billion in the three months ended March.

The consultancy's head of banking and finance, John Kensington, said the fall had to be seen against the record level of profits hit in the December quarter.

He said the way banks must calculate bad debts had added to costs, while lending growth had slowed.

"We've enjoyed very low levels of impairment [bad debts] for some time. These things tend to be cyclical and this could be the start of a tick up... I don't think we'll see them get any lower," Mr Kensington said.

Impairment costs more than doubled during the quarter, reflecting changes to accounting rules which require banks to account for expected losses rather than actual losses.

Mr Kensington said the dip in profits and higher bad debts would be watched especially given the growing global uncertainty and volatility.

"While it might be a pivot point, it's certainly not time to panic as the New Zealand banking sector as a whole still remains strong."

The report showed overall loan growth slowed to just over 1 percent, with TSB Bank showing the strongest growth. Interest rate margins, a key profit measure, were flat or weaker for most, while their cost of doing business was higher.

Mr Kensington said the banks would also feel pressure about their commercial behaviour and practices arising from the Australian Royal Commission into banking and financial services, and inquiries being made by New Zealand's Financial Markets Authority and the Reserve Bank.

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