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Banks' total assets push to new record high, return on equity rising, funding costs falling, but interest margins under pressure, KPMG survey shows

Posted in Business

By Gareth Vaughan

Times are pretty good for the country's banks with assets growing, profits and return on equity both rising, and funding costs declining, according to KPMG.

The firm's latest quarterly Financial Institutions Performance Survey (FIPS) highlights that, continuing on from the December quarter, total assets pushed further into unchartered territory in the March quarter, rising to record high of $386.6 billion by March 31. This was up 1.5% in the quarter.

"This is well above GDP (which rose 1% in the March quarter) and other measures of growth in the wider economy," KPMG said.

"Overall if we compare the last year, we see 3.9% growth in total assets since March 31, 2013. Although given the wider trend of easing in the level of liquidity and liquid assets being held (by the banks), the actual increase in gross loans and advances is 4.78% in the last 12 months reflecting the buoyant housing market despite the impacts from LVR restrictions and growth in Christchurch and Auckland."

Meanwhile, for the second straight quarter return on equity exceeded 16%.

"After a long period of returns in the range of 12-14%, this marks a clear strengthening of the net returns in the sector," KPMG said.

And for the March quarter the average annualised funding cost was 3.70%, down from 3.76% in the December quarter, and 3.88% in the March quarter last year.

Total net profit for all nine banks surveyed was $1.150 billion, a $5.7 million, or 0.5%, increase versus the previous quarter.

"When we compare the trend over the last six or 12 months, then we get a real sense of how strongly bank results have bounced back since the global financial crisis," KPMG said. "When we compare net profit for the last six months we see a 15% growth over the previous six months, or if we compare the profit for the last year - four quarters ended 31 March - we see a 22% increase in the sector."

However, four of five major banks showed declines in net profit after tax, ranging from Kiwibank's 15.4% drop to BNZ's 1.5%.

Kiwibank's operating expenses for the quarter rose $21 million, or 30%, to $90 million, which KPMG said is a record high, and clearly contributed to the profit drop. Profit declines at Westpac and Commonwealth Bank of Australia, which includes ASB, were driven by a fall in non-interest income. ANZ, the odd one out, recorded a 17% increase in profit bolstered by a $91 million insurance settlement relating to the bank's former involvement in the ING frozen funds.

Margin pressure

Heading down, however, was the sector wide net interest margin with this down two basis points during the quarter to 2.25% from 2.27%. Five of the nine surveyed banks recorded decreases in their interest margins, two (Kiwibank and the Co-operative Bank) were unchanged, and two (SBS and Westpac) recorded increases.

"SBS, driven by a decline in the bank's interest earning assets, experienced a five basis points increase in interest margin," said KPMG.

"We note that based on this quarter's results, margins are still being squeezed and the scope to reduce operating costs is lessening as is the reduction in impaired assets."

The ratio of collective provision to net loans and advances is down to 0.44%, its lowest since since September 2008, KPMG said.

Nonetheless the firm said indications are that further margin pressure is coming.

"Per the latest RBNZ data on interest rates, the average effective fixed rate was 5.51% in April 2014, which was 37 basis points below the average floating (rate) and reflective of the intense competition we have seen in two to three year fixed rate lending," said KPMG.

"The banks are not passing on the OCR rate rises fully as each step change has occurred, and the competitive market is insulating the homeowners from the full impact of the OCR rate rises. So if the effective floating rate mortgage rate has only risen 23 basis points since April 2013, six month term deposit rates have fallen by nine basis points over the same period. This is what is preserving the margin for the banks."

The average operating expenses to operating income ratio for all banks surveyed dropped 147 basis points in the March quarter to 40.75%. The best performers were ANZ and SBS with drops of 469 basis points and 335 basis points, respectively.

The banks covered in KPMG's survey are ANZ, BNZ, Commonwealth Bank of Australia's New Zealand operations including ASB, Heartland, Kiwibank, SBS, the Co-operative Bank, TSB and Westpac. KPMG is auditor to ANZ, Heartland, SBS, the Co-operative Bank and TSB.

The chart below is taken from the FIPS report

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5 Comments

The firm's latest quarterly

The firm's latest quarterly Financial Institutions Performance Survey (FIPS) highlights that, continuing on from the December quarter, total assets pushed further into unchartered territory in the March quarter, rising to record high of $386.6 billion by March 31. This was up 1.5% in the quarter.
 
"This is well above GDP (which rose 1% in the March quarter) and other measures of growth in the wider economy," KPMG said.
 
Are the banks' assets adjusted by the implicit price deflator to make a just comparison?

So, loan loss provisions are

So, loan loss provisions are running out, as are cost cutting options, and margins are being squeezed.
 
Term depositors, prepare to be screwed over.

Maybe, maybe not, their

Maybe, maybe not, their funding spreads are falling so I suspect they have more avenues than that to continue performance.

Here's Wells Fargo's results

Here's Wells Fargo's results today. Much of the same in the US:
 
Wells Fargo & Co, the fourth-largest U.S. bank, reported a 39 percent drop in mortgage revenue for the second quarter as lending volume dropped, underscoring the urgency for the bank to find other sources of income growth.
The bank managed to boost earnings and meet analyst estimates through gains from investments in stocks and bonds among other areas. But that income could be difficult to repeat in coming quarters, analysts said.
Meanwhile, the pressure on Wells Fargo's mortgage business, one of its largest sources of revenue for years, is continuing and intense."
 
 

And NZ banks are pricing

And NZ banks are pricing their mortgages off the market  - 6.5% rates are steep in a ZIRP world.   Mortgage demand growth is falling.