Credit ratings agency Moody's says big year after year increases in major Kiwi banks’ profits are coming to an end

Moody’s is forecasting an end to major New Zealand banks' run of record-breaking profits as margins continue to be tested and competitive pressures mount.

This comes just days after ASB posted a 10% rise in annual profit to a record-breaking $1.17 billion.

Speaking to reporters in Wellington on Friday, Moody’s Vice President of Investor Services Daniel Yu warned that the run of big annual increases in bank profits has likely run its course.

“It’s hard to see, with the competitive pressures, how profitability can get any better and there is probably some pressure because of the lower credit growth environment.”

He says the increased pressures on funding costs and more competitive pressures will see banks’ profits begin to ease.

“I don’t think you’ll see profits go backward, I think you’re just going to see a much slower rate of profit growth going forward.”

He still expects profits will grow but says growth will be lower than what it has been over the last few years.

ASB’s result was the second time the bank’s profit had tipped $1 billion – the last time its annual profit fell was in 2010.

Its Chief Executive Vittoria Shortt said the strong New Zealand economy was a major factor in the result.

And ASB is not the only New Zealand bank to report record profits.

According to the Reserve Bank, the major retail banks, ASB, BNZ, Westpac and ANZ made a combined profit of $4.9 billion in the year-to-December 2017.

Ten years earlier, that number was $2.8 billion.

But now Yu says New Zealand is in a lower credit growth environment that is adding more competitive pressure and funding costs are starting to rise.

He says the “sweet spot” for banking was between 2012-14.

Then things plateaued in 2017 and into this year.

“That improvement has run its course and from this point, you’re just going to see a sideways movement in terms of bank metrics.”

Despite this, Yu says the New Zealand banking sector is still healthy, compared to other similar sized banks around the world.

Two of the major recent risks, low dairy prices and housing, have subsided, he says.

“So we see a relatively favourable operating environment for the banks.”

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3 Comments

Moody's must be reading my comments on interest. Called this a couple of days ago.

'Socked by the old one, two'.... It could actually be a bigger combination of hits and may mean that the kiwi sinks into the canvass. 3. poor corporate earnings. 4. Foreign buyer ban this week. 5. House price falls. 6. Reduced bank earnings, which may have hit a hight water-mark now, etc etc. An alternative view perhaps but I can't see anything on the horizon that says that the kiwi is going to bounce up and keep fighting.

In other words, years of increases in major Kiwi banks’ provisions for non performing loans are just beginning. Now comes the hangover.

This story sounds like very similar stories from Australia. Young person gets into property and leverages themselves up on the never ending hype of rising values. Well it's working just fine in Oz? I do wonder what will come out of the RBNZ's investigations into mortgage lending that is all so hush hush at present. Maybe Moody's has an idea.

https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12102563