Volatility, regulation don’t hold back banks

Neither global volatility or new LVR regulations prevented the banking sector from turning in record profits in 2015, according to the latest KPMG Financial Institutions Performance Survey.

Wednesday, February 24th 2016, 12:09AM

by Miriam Bell

The survey shows that New Zealand bank profits rose by 6.94% in 2015, to hit an all-time record profit of $5.17 billion.

This result was based on margin growth of four basis points, lending growth of 7.11%, and a reduction in the operating income to operating expense ratio to a low of 37.32%.

The banking sector improved its overall capital adequacy ratio by 72 basis points to stand at 13.16%, while its Tier 1 Capital ratio rose to a high of 11.86%.

An increase in the impairment provisioning was the only low point in the results.

However, the report said this was reflective of the slow return to a normalisation of impairment charges, following the post-GFC period.

KPMG head of financial services John Kensington said that New Zealand banks achieved a “very positive scorecard” in 2015 – despite global volatility and further domestic regulation.

“Our banks have really proven themselves as well-run businesses that are helping to drive New Zealand’s economic engine.”

One of the significant drivers of lending growth was the continued momentum in the housing market.

But even the new tax rules and LVR limits introduced to cool the housing market resulted in better quality loan books, the report noted.

“The proportion of loans over the 80% bracket declined from 15.72% to 13.17% for the five major banks.”

Kensington said the banking sector is well-poised to continue its growth in 2016, although it does face some headwinds.

“There is some uncertainty ahead – including global volatility, ongoing concern around low dairy prices, and the continued threat of a sharp housing price correction.”

The report also reveals that one of the major issues the banking sector is set to face is the potential impact from the Reserve Bank’s proposed outsourcing rules.

Kensington said the Reserve Bank appeared to be reversing its position on outsourcing and requiring major banks to bring key operations back onshore.

“The Reserve Bank is looking to ensure that it can – if necessary, in the event of a global or regional issue – control a bank fully onshore.

“From the banks’ perspective, they will argue that part of the reason they’re so efficient is that they’ve set up global workforces capable of servicing their needs.

“This has allowed them to reduce the pricing that is passed on to New Zealand consumers.”

Many of the challenges faced by the banking sector globally are also present in the New Zealand market, the report said.

These include cybersecurity risks and cybercrime; the global economy; and challenges from disruptors in the form of new fast-moving internet-based businesses.

Tags: banks RBNZ