Bank loan provisioning increased in the March quarter for the first time in seven quarters, KPMG's latest quarterly Financial Institutions Performance Survey (FIPS) shows.
This came as New Zealand's banks posted record quarterly profit, with an 8% increase in net profit after tax to $1.74 billion from $1.614 billion in the December quarter of 2021.
In terms of the loan provisioning, banks' recorded a 1.2% increase in total provisioning to $2.47 billion in the March quarter. This featured a $40 million, or 1.9%, increase in collective provisioning to $2.179 billion, which was partly offset by a $9.9 million, or 3.3%, drop in individually assessed provisions to $293 million.
There had been declines in total provisions in every quarter since June 2020, following a ramp-up at the onset of the Covid-19 pandemic.
Despite the increase in the total provisioning level, KPMG says an increase in gross loans means the coverage ratio, or provisions held compared to total gross loans, remained flat. The ratio rose from 0.47% in December 2019 to a peak of 0.70% in September 2020, and had since fallen in each consecutive quarter to 0.50% in December 2021 before holding steady in the first quarter of 2022.
"Provisioning levels still remain above those seen before the pandemic, likely driven by the economic uncertainty with high inflation and interest rates driving the cost of living difficulties for many households. It will be interesting to see whether continued inflation, rising interest rates and the conflict in Eastern Europe will place further pressure on borrowers and lead to an increase in missed repayments and arrears. Once this flows through the banking sector's provisioning models, it may lead to an increase in collective provisions and reduce profits," KPMG says.
Profits, meanwhile, were boosted by a 2.11% rise in net interest income to $2.99 billion, with non-interest income up $118.8 million, or 16.1%, to $857 million.
New bank mortgage lending dropped $7.04 billion in the March quarter from the December quarter to $17.646 billion. Gross lending, however, rose 1.25% to record highs at $493.7 billion. KPMG says the increase in gross lending suggests either lower principal payments were made by borrowers as interest rates rose, fewer borrowers switched between borrowers, or there was a combination of both these factors at play.
A fatter net interest margin across the majority of banks, of about 2.1%, also helped profits. The average net interest margin across the big five banks - ANZ, ASB, BNZ, Kiwibank and Westpac - was 2.02% in the December quarter.
Operating expenses fell $28.1 million, or 1.93%, to $1.429 billion. The cost to income (CTI) ratio across the banks fell to its lowest level in more than five years, at an average of 37.10%. As reported by interest.co.nz on June 1, this featured a CTI of just 29.7% for BNZ, and 32.2% for ANZ. The BNZ CTI was boosted by the reversal of a $35 million Holidays Act provision.
"The result seems immune at this stage to the combined impact of inflation, rising interest rates, supply chain issues, intended and unintended regulatory impacts on lending volumes, and a decrease in confidence. However, it is hard to believe these impacts will be short lived and will not result in a weakening of the banking sector results in the second and third quarters," KPMG suggests.
"Over the remainder of the year it will be interesting to see how the wider economy fares and whether the impact of rising interest rates and the rising cost of living leads to an increase in arrears. Coupled with a fall in business confidence and the falling housing market, this would likely result in two impacts. Firstly, it would require the banks to consider higher levels of provisioning once again. Secondly, we might see reduced discretionary spending as household budgets come under pressure from rising costs and their sense of wealth is battered by falling house prices," KPMG says.
KPMG is an auditing and financial advisory firm that includes banks among its clients.
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