Bank margins shrinking

Trading bank margins are stable or falling, with fierce competition for term deposits, reduced margins on mortgage lending and the impact of bad debts on overall performance, according to studies from the Reserve Bank of New Zealand and accounting firm KPMG.

On the same day as an Opposition-led inquiry into banking practice produced a report accusing the banks of featherbedding their margins during the recession, the RBNZ reported that "margins on floating rate mortgages have declined towards normal levels".

The RBNZ criticised banks earlier this year for holding on additional margin as interest rates fell, to the potential detriment of economic recovery.

"Some broader measures suggest that overall margins are fairly steady" at around 2.1 percent, the RBNZ says. Competition for retail deposits has raised retail funding costs despite lower wholesale costs.

"This suggests that the marginal funding costs for banks relative to the OCR are continuing to rise."

In its quarterly Financial Institutions Performance Survey, KPMG found a slight improvement in net interest margins among the trading banks of about 2.07 percent, although this reflected some one-off "noise" from early mortgage repayment and other influences.

"Significantly, the cost of fund has increased faster than the associated lending income, reflecting the tough competition in the market for deposits," KPMG says.

Meanwhile, the RBNZ also suggests that New Zealand's high debt to Gross Domestic Product may not be as much of a threat to the strength of the New Zealand dollar as is often feared.

"The gross assets and liabilities that comprise the net position are much lower than in many other countries, reducing the risk that our net liability position will rise as a result of a sizable portfolio of overseas assets becomes impaired."

With much debt raised in New Zealand dollars, or hedged immediately against the kiwi dollar when raised in foreign currencies.

"This prevents indebtedness rising significantly when the New Zealand dollar weakens. Thus a weakening in the New Zealand dollar and the prospect of a future recovery tends to attract international investors to New Zealand dollar investments," the RBNZ says in its bi-annual financial stability report.

-BUSINESSWIRE