Banks profits rose sharply again in the last three months of 2021, but KPMG says they face a tougher 2022.
Cost-cutting, reductions in bad debt, and expanding mortgage lending have swelled banks’ profits.
Banks’ after-tax profits for the last three months of 2021 jumped by 6.7 per cent to $1.61 billion from $1.51b in the previous three months, analysis by KPMG shows.
But the upward rise in profits could be challenged this year by inflation, rising interest rates and falling house prices, 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,” he said.
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Banks have continued to grow their home loan businesses as a proportion of their businesses, KPMG’s data also showed.
In December 2019, $59.33 in every $100 they had loaned out was on home loans, with just $35.92 lent to businesses and farmers.
In December last year, $64.61 in every $100 was loaned to people to buy homes, and the proportion loaned to businesses and farmers dropped to $31.92.
Reserve Bank governor Adrian Orr discusses the level of concern about inflation in February.
Kensington said the rise in bank profitability charted in the KPMG Financial Institutions Performance Survey report was primarily driven by large decreases in operating expenses, particularly from three of the larger banks.
They were ASB, which cut costs by $51 million, Westpac, which cut costs by $37.8m, and BNZ, which had its operating expenses drop by $28.6m.
Banks have shut many of their branches during the Covid-19 pandemic, and many households have switched to doing more of their banking virtually.
Banks had also been able to earn more from home loans as their loan books grew when borrowers took out larger loans to buy homes.
Kensington said the margins earned on home loans fell slightly during the last three months of 2021, meaning they earned less from each dollar lent to households to buy homes.
Banks’ loan books grew by 1.63 per cent to $487.6b in the last three months of 2021.
The proportion of new home loans going to first-home buyers rose as investors, hit by changes to tax deductibility on mortgages, bought fewer properties.
Lending to investors in January this year was half the level it was in January last year, KPMG said.
Banks also continued to class fewer of their loans as troubled.
Kensington said there was a 5.3 per cent reduction in total loan provisioning, which reduced it to $2.44bacross the banking sector.
Provisioning is money banks expected to lose on loans.
It was the fifth quarter in a row in which banks reduced their provisioning, much of which was put in place near the beginning of the pandemic, Kensington said.
But, he 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.”
Mortgage lending had slowed, house prices had dropped and the time to settle had extended. General business confidence had also fallen, said Kensington.
“It’s going to be interesting to see how this plays out over the next two or three quarters.”
Keith McLaughlin, chief executive of the Centrix credit reporting bureau, which compiles credit files on individuals, said: “The message to both business and consumers is clear. The cost of borrowing is increasing.”
“Rising interest rates will impact household disposable incomes as fixed mortgage rates start being renewed throughout the year,” he said.
“Inevitably homeowners will need to renew their mortgages at a higher rate than they are currently paying, reducing money available to spend elsewhere in the economy.”