Leaner times ahead for banks

New Reserve Bank figures show that last week's bank mortgage rate cuts followed a period when the lenders were earning the fattest margins seen since the end of 2006.

A raft of banks – including ASB, ANZ and SBS Bank – trimmed their interest rates, but the figures show they were cutting from margins they last enjoyed during the full bloom of the credit boom.

By the end of September, the banks' net interest margins (interest on lending minus interest paid on borrowings) had grown to 2.32 per cent. These had dipped as low as 2 per cent in December 2009.

Some market sources feel that low growth in lending meant it was inevitable that banks would start competing much more aggressively on price for the little business on offer.

The housing market remains quiet with both sales and housing consents way down on the boom years. One former bank executive, who did not want to be named, said the wide margins in the credit boom and again at the end of September last year probably reflected a once-in-a-lifetime restructuring of economic activity when consumer willingness to take on debt increased sharply.

No further boom is possible, and the future for banks is one of tougher competition in lending, and efficiency drives.

That is likely to mean a reduction in branch numbers, job cuts, greater outsourcing and other efficiency measures in a bid to continue a record of profits growth for shareholders, he said.

"The reality is the banks are making good money at the moment, but it is a kind of one-off thing," he said. "It is largely because of a style shift in the economy. Going forward when the pie is not increasing in size, it only takes so long before they all go feral and start fighting with each other and start cutting margins."

- © Fairfax NZ News

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