Lending up but profits flat

New Zealand’s five major banks* profits flattened in the second quarter of 2015, although lending growth continued, according to a new analysis by PricewaterhouseCoopers (PWC).

Monday, September 7th 2015, 1:21PM

by Miriam Bell

The banks’ net profit before tax levelled off to $1.69 billion, which was a small decrease of $2 million compared to the first quarter of 2015.

However, in the analysis, PWC banking & capital markets sector leader Sam Shuttleworth said that, while net profit before tax remained flat, there were some interesting movements that contributed to this.

For example, net interest income has increased by $45 million (2.2%) and impairment losses on loans have decreased by $27 million (27%).

At the same time, a one-off reclassification means that other operating income has decreased by $1 million (0.1%) while operating expenses increased by a noticeable $73 million (6.7%).

While net interest income has increased, this seems to have been driven by a $7.4 billion (2.3%) increase in gross lending - to $334.7 billion - rather than an increase in lending margins.

Shuttleworth said that, overall, the banks’ net interest margin for the second quarter remained in line with the first quarter at 2.26%.

“This flattening in net interest margin is due to a combination of a contraction in lending margins, which have been offset by the banks experiencing more favourable funding conditions during the second quarter.”

Total lending growth for the second quarter was 2.27%, up from the previous quarter’s 1.90%, and the PWC analysis notes that this growth is higher than in any quarter during the 2014 calendar year.

Meanwhile, mortgage lending growth for the second quarter was 1.85%, which was up from the first quarter’s 1.72% growth.

Total mortgage lending for the second quarter came in at $197.3 billion, which means the major banks’ are close to having mortgage lending in excess of $200 billion.

In the analysis, Shuttleworth said the highly competitive lending environment continued in the second quarter - with banks offering mortgage interest rates below 5.0%, continued pressure on lending margins, and preferences by customers for lower margin fixed rate mortgages.

However, the second quarter of 2015 is now the fifth consecutive quarter where growth in mortgage lending was lower than corporate lending growth in percentage terms.

Also, the percentage of mortgages with an LVR in excess of 80% has continued to fall.

Such mortgages sat at 13.8% of total mortgage lending in the second quarter of 2015, as compared to the first quarter where they made up 14.4% of total mortgage lending.

The PWC analysis mentions the Reserve Bank’s impending LVR tweaks, but doesn’t speculate on what result they might have.

However, Shuttleworth does note speculation the RBNZ is likely to cut the OCR further in 2015.

“This could see further demand in short to medium-term fixed interest rates, as customers seek certainty with low mortgage interest rates and possibly fuelling further growth in lending.”

The banks continue to hold well above the regulatory minimums for capital levels, with the average total capital ratio hovering around 12.5% in the second quarter of 2015, states the PWC analysis.

But, once the RBNZ’s new asset class treatment for residential property investors comes into effect on 1 November, the banks will be expected to hold additional capital for residential property investment loans or to reduce their current capital adequacy headroom.

Shuttleworth said that, depending on the strategy of each bank, this may have an impact on pricing for property investors.

Massey University banking expert David Tripe said his impression was that mortgage lending was growing quite rapidly, so he was a little surprised the PWC analysis found business lending growth was stronger.

However, for a long time it was the other way round so the stronger business lending growth was probably a recovery, he said.

“The Reserve Bank’s looming LVR restrictions might slow mortgage lending down further. But I suspect their impact may not be tremendous. In fact, it may be quite small.”

In Tripe’s view, the PWC analysis showed there were some interesting things happening around the margins.

For example, there has not been the expected reduction in margins which was probably due to the fact funding costs are falling faster than banks interest rates.

“This has been a fortunate window of opportunity for the banks and has given them the opportunity to be competitive.”

*Westpac, ASB, ANZ, BNZ and Kiwibank

Tags: ANZ ASB banks BNZ Kiwibank Mortgage Rates property investment RBNZ Westpac