The Reserve Bank of New Zealand has noted significant profit growth from banks since 2009, but now expects that growth to slow as competition intensifies and banks have to retain more capital to meet tougher Basel III capital requirements.
The Reserve Bank said in its half yearly Financial Stability Report bank profits troughed in 2009 because of higher bad debt expenses and taxes after the major Australian-owned banks agreed to large one off tax payments.
“Profitability has subsequently recovered, reflecting the cyclical improvement in the economy over recent years and the associated decline in bad debt expenses, together with higher net interest margins,” it said.
Bank retail net interest margins had risen from around 190 basis points in late 2009 to around 230 basis points now as customers shifted to more profitable floating rate loans.
“Bank profitability is slightly lower than pre-crisis levels, measured by the return on assets or the return on equity,” it said.
“While there is further scope for bad debt expenses to decline and boost profitability, it is unlikely that profit rates will increase much further,” the bank said.
The central bank said the outlook for profits would be shaped in part by how banks responded to lower credit demand. That could include further cost reductions and more intense competition for market share.
“Greater competition would limit the potential for further increases in bank net interest margins, which have been rebuilt somewhat over the past few years.”
The bank said the increase in net interest margins had been driven by a re-pricing of risk on loans to both households and businesses, and “by progressively passing higher funding costs through to borrowers as relatively low margin fixed rate loans roll off.”
“Typical future rates of return on equity are likely to be somewhat lower as a consequence of the implementation of the new Basel III rules for capital adequacy,” it said.
The Reserve Bank, which regulates New Zealand’s banking sector and runs monetary policy, said the banks were well placed to meet the tougher Basel III capital rules and were also well above the Reserve Bank’s minimums for stable funding, known as the Core Funding Ratio.