Bank profits are rising strongly

19:18, Jul 18 2013

Bank profits continue to climb, despite intense competition in the industry squeezing margins.

Accountants KPMG's latest quarterly survey of financial institutions' performance shows the combined profits of nine local banks were up 13 per cent in the March quarter to $971 million, compared with the previous three months. The previous quarter's $860m haul was also up 11 per cent.

KPMG partner John Kensington said the latest result was strong, reflecting lower trading costs, early signs of economic growth and improving business confidence.

Some banks, particularly the BNZ, had made most of their gains on paper only, on the back of changing values in derivatives and other financial instruments.

However, even without accounting treatments, banks were still growing strongly.

Products such as KiwiSaver were on the upswing and the banks were 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 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 levels were now starting to encourage people to take on more debt.

"From the bank's 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," Lister said.

"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."

However, critics of the banks are concerned the profits are excessive.

Robert Reid, general secretary of 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 comments that New Zealand bank profits were on a par with other developed countries.

In fact, their pre-tax returns on assets are 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 compared 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.

While Organisation for Economic Co-operation and Development figures showed New Zealand and Australian bank profits were comparatively high, this was partly reflected in high credit ratings, which meant they could borrow more cheaply. Fairfax NZ

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