Bank pricing war heats up
Fierce competition among the banks for prime customers could result in a price war, KPMG's annual survey of financial institutions reports.
The survey found 2012 was a great year for the banks with improved net interest margins - the difference between their borrowing and lending costs - combining with lending growth and reduced provisioning for bad debts to lift profits by 13.6 per cent compared to the previous year.
The registered banks were able to move their net interest rate margin to 2.25 per cent, a level not seen since 2006 before the global financial crisis struck. But that margin growth is threatened by the current battle for good customers in a market where lending growth is still muted, and many households continue to work hard to reduce debt.
"Banks are offering quality customers discounts to reduce the risk they will shop for a new banker," KPMG partner John Kensington said. That puts a great deal of bargaining power into the hands of good borrowers willing to push for a better deal, and banks have plenty of headroom to grow their lending, having increased customer deposits by 9.8 per cent over the year.
Though future growth will not match the banking boom in the run- up to the global financial crisis, Kensington is picking the banking sector will continue expanding as a proportion of the economy.
Kensington also made an impassioned plea for less bank- bashing, calling on Kiwis to appreciate the profits they make, which he said were not excessive, and their financial stability.
"It's time to look at these global market leaders and treat them more as we would our winning sports teams or Olympic medallists. Rather than criticise them it might be more appropriate to reflect thankfully on what our strong banks allow us, as consumers, to do."
He said New Zealanders needed only to look overseas to see what a weak banking sector meant for an economy.
"Consider if the banking sector, instead of making profits of around $2 billion to $3.5 billion over each of the last three years, had actually made losses. Credit ratings would be much lower and the banks would have to borrow at much higher rates, if they could actually raise funds at all.
"New Zealanders currently enjoying mortgage rates [floating] of 4.9 to 5.2 per cent would conceivably be borrowing at a rate of around 10 per cent."
The long-term picture was that as banks had grown their loan books, they had cut the net interest margins they were willing to accept to lend, Kensington said.
That appears to contrast with what has happened in the non-bank lending sector, which saw a massive clear-out of finance companies from 2006-2010. Interest margins have increased as their costs of funding have fallen, and customers are not paying less for loans.
- Banks' gross lending increased by 3.2 per cent.
- Profits rose by 13.6 per cent.
- Deposits were up by 9.8 per cent.
- Net interest margins rose to 2.25 per cent.
- Banks' impaired-asset expense fell by more than a quarter.