Bank profits climb 20% in 2014 in face of cheaper funding

New Zealand bank profits rose 20 percent to a record last year as low global interest rates made it easier for lenders to compete for mortgage customers in a highly competitive market.

Net profit across New Zealand's registered banks rose to $4.84 billion in calendar 2014 from $4.02 billion in 2013, according to KPMG's 2014 financial institutions performance survey. The bulk of the increase in profits came from a $657 million increase in non-interest income, including a $91 million insurance settlement for ANZ Bank New Zealand and an $88 million gain for Westpac Banking Corp on the sale of its Visa shares. Underlying profit rose 17 percent to $6.7 billion, while bank's net loans grew to $341 billion from $325 billion a year earlier.

KPMG head of financial services John Kensington said much of that growth came in the housing sector, which accounts for about 53 percent of lending, with a shortage of supply in the country's two biggest cities of Auckland and Christchurch driving competition.

"Competition has remained fierce with banks having no choice but to match competitors' rates or other incentives in order to attract new customers and preserve their existing customer base," Kensington said. "Notwithstanding this, banks have only experienced a small decline in interest margins of 2 basis points owing to relief on the funding side as conditions in global wholesale markets remain favourable."

Part of that competition was driven by the Reserve Bank's October 2013 imposition of limits on home lending with a deposit of less than 20 percent, followed by a series of interest rates hikes last year, taking the official cash rate to 3.5 percent from 2.5 percent.

"Comments by Executives of the larger banks indicate that they have been starting to feel pressure on their margins, and this together with better margins in the non-banking sector, has led to the banks looking to non-traditional segments such as the finance companies sector to bolster their profits," Kensington said. "The tough competition has not been limited to the mortgage market with participants reporting similar competition in the corporate and commercial sectors, with again very tight margins and pre-emptive offers of rate reductions."

New Zealand's relatively high interest rates compared to the rest of the world enabled banks to access lower funding costs, which meant local lenders haven't had to compete as aggressively for retail deposits, which grew to $244.7 billion in 2014 from $229 billion at the end of 2013.

Lending grew 4.85 percent in the year, with household lending the biggest driver. Agriculture and business sector lending was more muted as farmers used the record dairy payout in 2013 to repay debt, while business showed a preference to fund investment through internal sources rather than credit.

Asset quality remained strong in 2014, with impaired asset expense as a ratio of gross loans falling to 0.08 percent, equivalent to levels before the global financial crisis.

Global rating agency Fitch Ratings today affirmed its AA- credit ratings for the four major Australian-owned banks, saying ANZ Bank New Zealand, ASB Bank, Bank of New Zealand and Westpac New Zealand have conservative risk appetites and robust risk management practices, as well as strong domestic franchises and consistently health operating profitability.

The rating agency last month said New Zealand's lenders were on a stable footing in 2015, with the country's economic momentum expected to underpin solid earnings in the period.

(BusinessDesk)