New Zealand's banks keep making healthy profits, despite a drop off in lending numbers and lower returns from interest. The banking sector recorded $1.45 billion net profit after tax (NPAT) during the March quarter, with this big sum coming as a surprise to many. The big increase in profits was primarily driven by growth in non-interest income, as the banks continue to diversify in the current low interest environment.
According to the KPMG Financial Institution Performance Survey (FIPS) from March 2019, bank profits rose by 8.98% to $1.45 billion in the first three months of 2019. Annual bank profits were up a massive 17%, which is a big bounce back for a sector which had seen profits fall after the housing market peak in 2017. Non-interest income was up $190 million over the quarter, following a 10.36% decrease in non-interest income in the previous quarter.
Overall, net interest income was down by $69 million over the quarter, with impaired asset expenses up $27 million. The banking sector continued to see steady loan growth, up 1.48% for the quarter and 5.25% for the year. House sales have been struggling in New Zealand for some time, although according to the REINZ, national sales rose by 3% and Auckland sales rose by 13.6% in June compared to May. While the volatile nature of interest-based income has had a significant impact on results over the year, asset quality has remained fairly steady.
Despite a seasonal decline in mortgage lending data for the quarter, first home buyers are increasing their share of new lending, with many using Kiwisaver as their first home deposit. The data indicates that over a third of first home buyers’ deposits are coming from Kiwisaver, with the real number probably closer to a half of all deposits. According to John Kensington, Head of Banking and Finance at KPMG, “The movement in non-interest income might be the biggest driver of the result, but the slow-down in the mortgage lending stats likely holds a better barometer to how things are running at present."
This quarter has also seen key developments in the review of Phase 2 of the Reserve Bank of New Zealand (RBNZ) Act, including a review of the deposit protection regime, a review of RBNZ’s enforcement tools and penalty system, and efforts to combine regulatory regimes for banks and non-bank deposit takers. "In the current market this represents a mixed bag of new tools, and further indication that the RBNZ is looking to change things up. This quarter has seen the sector experience a high volume of media interest, with coverage across a range of diverse topics,” said Mr Kensington.
Despite the surprise of such healthy profits in the current economic landscape, at least the banks seem to be providing a good service. According to KPMG’s 2019 Customer Experience Excellence Report, New Zealand’s financial services sector has maintained the highest sector score for customer experience for the second year in a row, although the score was 2% lower than 2018. TSB took out the top spot in the report, with Kiwibank and BNZ also making the top 10, and BNZ recording the most significant upwards shift over the year.