Bank profits rose sharply again in the last three months of 2021, but KPMG says they face a tougher 2022.
Cost-cutting, reduction in bad debts and expansion of mortgage lending boosted bank profits.
Banks’ after-tax profits for the last three months of 2021 jumped 6.7% to $1.61 billion, from $1.51 billion in the previous three months, according to analysis by the consultancy to KPMG companies.
But rising profits could be challenged this year by inflation, rising interest rates and falling house prices, said John Kensington, head of banking and finance at KPMG.
“It will be the first time in a long time that the stars have aligned negatively, and it looks like a tough time ahead for the economy and the sector,” he said.
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Banks have continued to expand their home lending business in proportion to their business, KPMG data also showed.
As of December 2019, $59.33 of every $100 they lent was in home loans, including $35.92 lent to businesses and farmers.
In December last year, $64.61 of every $100 was lent to people to buy homes, and the proportion lent to businesses and farmers fell to $31.92.
NEW NZ PARLIAMENT
Reserve Bank Governor Adrian Orr discusses the level of concern over inflation in February.
Kensington said the rise in bank profitability shown in KPMG’s Financial Institutions Performance Survey report was mainly due to sharp declines in operating expenses, particularly at three of the largest banks.
These were ASB, which cut costs by $51 million, Westpac, which cut costs by $37.8 million, and BNZ, whose operating expenses fell by $28.6 million. millions of dollars.
Banks have closed many of their branches during the Covid-19 pandemic and many households have decided to do more of their banking virtually.
Banks were also able to earn more from home loans, as their loan portfolios grew as borrowers took out larger loans to buy homes.
Kensington said spreads on home loans fell slightly in the last three months of 2021, meaning banks were earning less on every dollar lent to households to buy homes.
Bank loan portfolios grew 1.63% to $487.6 billion in the last three months of 2021.
The proportion of new home loans going to first-time buyers increased as investors, affected by changes in the tax deductibility of mortgages, bought fewer properties.
Investor lending in January this year was half that of January last year, KPMG said.
Banks also continued to classify fewer of their loans as distressed.
Kensington said there had been a 5.3% reduction in total loan provisioning, bringing it down to $2.44 billion across the banking sector.
Provisioning is the money banks are expected to lose on loans.
It was the fifth consecutive quarter in which banks had reduced their provisioning, much of which was put in place towards the start of the pandemic, Kensington said.
But, he said: “While the results released for the December 2021 quarter were strong, since then New Zealand has seen both inflation and interest rates rise significantly and fast.”
Mortgage lending had slowed, house prices had fallen and the settlement period had lengthened. General business confidence had also fallen, Kensington said.
“It’s going to be interesting to see how that plays out over the next two or three quarters.”
Keith McLaughlin, managing director of credit bureau Centrix, which compiles individuals’ credit reports, said: “The message to businesses and consumers is clear. The cost of borrowing is rising.
“Rising interest rates will impact household disposable income as fixed mortgage rates begin to roll over throughout the year,” he said.
“Inevitably, homeowners will have to renew their mortgages at a higher rate than they are currently paying, which will reduce the money available to spend elsewhere in the economy.”