Banking profits on the rise
Bank profits continue to climb, despite intense competition putting the squeeze on margins.
KPMG's latest quarterly Financial Institutions Performance Survey shows combined profits of nine local banks rose 13 per cent in the March quarter to $971m, compared with the previous three months. The previous quarter's $860m haul was also up 11pc.
KPMG partner John Kensington said the strong result reflected lower operational costs, early signs of economic growth and improving business confidence.
Some banks, particularly BNZ, had made most of gains in paper only, on the back of changing values in derivatives and other financial instruments. But even without accounting treatments, banks were still growing strongly.
Products like Kiwisaver were on the upswing, and able to borrow overseas money more cheaply. A 4.7 per cent reduction in costs was the other major contributor to the improved result.
Mark Lister, head of wealth at Craigs Investment Partners, said there was a perception that banks were charging too much in fees, but most of their profits were sourced from interest. They also had more money to lend because Kiwis had fled into term deposits after the global financial crisis.
Bad debts had reduced and rising confidence was starting to encourage people to increase debt.
"From the banks' point of view, they want more people to be borrowing money. They don't do well when everyone's risk averse and paying back debt.
"You've had the Auckland housing market go full steam ahead and that's brought a whole range of people out of the woodwork that are happy to borrow money."
Critics are concerned the profits are still excessive.
Robert Reid, general secretary of the First Union which represents bank workers, said he still had serious concerns banks were making their profits by pressuring staff to meet sales targets.
"A bank can only make profits really by bringing in money at one level, interest, and selling it on as debt at a higher level. Banks make their money on those margins.
"So by the real sales pressure of staff members on the public to take more loans or debt . . . certainly that is one of the major aspects of how the banks can be so profitable."
Critics gained further fuel for their argument last December when Reserve Bank Governor Graeme Wheeler was forced to retract previous comments that New Zealand bank profits were on a par with other developed countries.
In fact, their pre-tax returns on assets were the fifth highest in the world, behind Iceland, Singapore and Australia.
However, Kensington said people were often overwhelmed by the size of bank profits.
They were "very large entities with enormous balance sheets so by definition they have very large profits", he said. But their return on assets was quite low with other sectors. Kiwi banks had a 1 per cent return on assets, whereas the top 10 listed companies on the NZX averaged 6.5 per cent.
Their return on equity was about 14.3 per cent, compared to 13.7 per cent.
While OECD figures showed New Zealand and Australian bank profits were comparatively high, this was partly reflected in their high credit ratings which meant they could borrow more cheaply.
The survey showed interest margins were still under pressure with intense competition in the mortgage market.
Net interest margins, which represent the premium added to money before it is lent, fell 4 basis points to 2.24 per cent.
Cheapest by far were Kiwibank (1.78 per cent margin) and TSB Bank (1.98 per cent), while the newest bank, Heartland, occupied the other extreme at 4.21 per cent.
The big four Australian-owned banks all had margins ranging between 2.15 and 2.35 per cent.
Total loans continued to grow strongly, up 1.1 per cent over the last quarter. SBS was the only lender to see a quarterly decrease in loans (2.9 per cent).