KPMG’s Financial Institution Performance Survey (FIPS) December 2018 quarterly analysis has revealed a 10.36% decrease in the New Zealand banking sector’s net profit after tax (NPAT), when compared to the September quarter. Profits dropped to $1,335 million for the quarter ending December 2018, with the decrease following a record profit in the quarter prior.

A large drop in the volatile non-interest income (down $214 million) and spike in impaired asset expense (up $102 million) were the main drivers for the drop, which was partially offset by an improvement in net interest income (up $86 million). Asset quality remained steady for the quarter, along with loan growth, which experienced an increase of 1.16%.

The Reserve Bank of New Zealand (RBNZ) capital proposal remained the subject of headlines over recent months, dominating discussions in the sector. Some of the potential flow-on impacts from the proposed changes were lower rates on deposits, higher rates on lending, a possible reduction of available credit in the economy, and lower share prices of banks.

“The whole process right from the receipt of submissions, through the consultation that followed, up to the final proposals adopted and the impact from them will be watched and ultimately felt by the whole economy. RBNZ has been clear that while they feel this level and structure of capital is justified, this is a consultation and they want to hear from everyone. The industry is less convinced, believing the sector has and is sufficiently capitalised and that there will be some unintended impacts of the level of capital proposed that will harm the New Zealand economy,” says John Kensington, Head of Banking and Finance at KPMG.

The New Zealand Government’s Tax Working Group (TWG) released their Final Report in February with 99 recommendations, and KPMG has released a summary of the Final Report with initial views on these recommendations (link on page 3). A capital gains tax proposal has been the centre of speculation.

“This is another area where we are faced with two sides to the argument, but this has the added complication of the TWG findings becoming a political football” says John Kensington.

This quarter’s review also includes insights from KPMG Lighthouse Partner, Stephen Hastings on AI in the financial services industry and the importance of algorithm assurance.