Banks weather storms to record profits

The five main banks made combined profits of $1.3 billion after tax in the first six months of their 2010 financial years, having weathered the global financial crisis and the domestic recession, according to an industry report.

The "respectable, if unspectacular" profits for ANZ National, ASB, Bank of New Zealand, Westpac and Kiwibank turned around a collective $1.4b loss racked up in the preceding half year, PricewaterhouseCoopers says in its latest edition of New Zealand Banking Perspectives.

However, its financial services partner Sam Shuttleworth said although the headline profits suggested an impressive turnaround in fortunes, the banks' underlying position had not improved as dramatically as it might appear.

Profits after tax were ahead just 3 per cent, or $39m, but before tax they were down 15 per cent or $287m.

Core earnings were up 25 per cent mainly because of a favourable valuation of some financial instruments.

Bad and doubtful debts had also fallen by $250m to $768m due mainly to fewer writeoffs in the corporate sector.

But bad-debt writeoffs for housing were down only $7m to $453m, suggesting that the deterioration in household lending had not yet bottomed. Total lending was unchanged at $277.2b with 3 per cent growth in household lending largely offset by a reduction in corporate lending.

While banks appeared to be back in business lending, higher interest rates meant many businesses would be put off borrowing, Mr Shuttleworth said.

The partial reversal of provisioning relating to a massive tax dispute which was settled with Inland Revenue last year also helped the bottom line.

The banks agreed to pay 80 per cent of a combined $2.2b in tax relating to foreign structured financial transactions which the High Court deemed to be tax avoidance schemes.

Net interest margins were down slightly because of higher funding costs as the banks fought for retail deposits to meet tougher prudential requirements introduced by the Reserve Bank in April.

The banks are required to fund at least 65 per cent of their businesses using domestic deposits to reduce their exposure to the more volatile international money markets.

That ratio is expected to increase to 75 per cent in 2012.

Mr Shuttleworth said at least some of the banks had been able to improve their net interest margins by also increasing interest rates on lending.

Pressure to increase lending interest rates would remain as the banks looked to pass on higher funding costs to customers and the recently low net interest margins returned to pre-credit boom levels, he said.

"It is evident the banks are back, but are still below levels that we saw before the global financial crisis."

However, the banks seemed to be well positioned to return to normal levels of profitability and activity.

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