Inflation, rising interest rates, and falling house prices could challenge the rise in profits
Bank profits have continued to rise due to cost-cutting, reductions in bad debt, and expanding mortgage lending, as the cost of borrowing for home buyers is increasing.
The last three months of 2021 saw banks’ after-tax profits jump by 6.7% to $1.61 billion from $1.51 billion in the previous three months, according to the KPMG Financial Institutions Performance Survey report.
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But inflation, rising interest rates, and falling house prices could challenge the upward trend in profits this year, said John Kensington, KPMG’s head of banking and finance.
“This will be the first time in a long time where the stars have aligned in a negative way, and it looks to be a challenging time ahead for the economy and sector,” Kensington told Stuff.
KPMG’s data also showed that banks have continued to grow their home loan businesses as a proportion of their businesses.
In December 2019, $59.33 in every $100 loaned out by banks was on home loans, with $35.92 lent to businesses and farmers. In December last year, $31.92 in every $100 was loaned out to businesses and farmers, while $64.61 was loaned to people to buy a house.
Kensington said the rise in bank profitability was primarily driven by large decreases in operating expenses, particularly at three major banks: ASB cut costs by $51 million, Westpac cut costs by $37.8 million, and BNZ had its operating expenses drop by $28.6 million.
During the COVID-19 pandemic, banks closed many of their branches and many households switched to doing more of their banking online. Banks also earned more from home loans as their loan books grew when borrowers took out larger loans to buy homes, Stuff reported.
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Kensington said the margins earned on home loans saw a slight dip during the last three months of 2021. This meant the banks earned less from each dollar lent to households to buy homes.
Banks’ loan books rose by 1.63% to $487.6 billion in the last three months of 2021.
The proportion of new home loans going to first-home buyers increased as investors, impacted by changes to tax deductibility on mortgages, purchased fewer properties.
KPMG said lending to investors in January this year was half the level it was in January the previous year.
Banks also continued to class fewer of their loans as troubled.
Kensington said total loan provisioning – money banks expected to lose on loans – was reduced by 5.3%, which trimmed it down to $2.44 billion across the banking sector.
It was the fifth quarter in a row that banks had reduced their provisioning, much of which was put in place near the beginning of the pandemic, Kensington said.
“While the results reported for the December 2021 quarter are strong, since then, New Zealand has seen both inflation and interest rates rise significantly, and quickly,” Kensington told Stuff.
Kensington said mortgage lending had slowed, house prices had dropped, and the time to settle had extended. General business confidence had fallen as well.
“It is going to be interesting to see how this plays out over the next two or three quarters,” he said.
“The message to both business and consumers is clear. The cost of borrowing is increasing,” Keith McLaughlin, chief executive of the Centrix credit reporting bureau, told Stuff.
