Banks profits flat, interest rates low and business confidence drops.
Profit growth for the New Zealand banking sector has flat lined for the quarter ending June 2019. Net profit after tax (NPAT) experienced a slight drop to $1,448 million, in contrast to $1,454 million for the quarter prior, reveals KPMG's Financial Institution Performance Survey (FIPS) June 2019 quarterly analysis.
The drop in profit growth follows a series of varied results for the sector. After an increase of 8.98% in the quarter ending March 2019 and a decrease of 10.36% for the quarter prior, the fluctuation of results continue to demonstrate the volatile nature of the figure.
The result was predominantly driven by increases in net interest income ($37m) and non-interest income ($46m), and a drop in impaired asset expense ($22m), offset by large increases in operating expense ($64m) and tax expense ($48m).
Asset quality remained stable for the quarter with provisioning and gross impaired loans growing in line with balance sheet growth while High LVR (loan to value ratio) loans continued to grow.
On the local economic front, interest rates dominated headlines with the Reserve Bank of New Zealand (RBNZ) reducing the Official Cash Rate to a record low of 1%; down 50 basis points (bps) contrary to the market expectation of a 25 bps reduction. Banks have capitalised on these low interest rates, locking in cheap funding for an active spring quarter ahead for mortgages.
Interest rates also continue to dominate speculation at a global level, with inverted yields in US treasuries sending a worrying signal to the market, seen to some as a clear indicator of the future for the both the US and the global economy.
In the regulatory space, public commentary on conduct, culture and capital has eased as the industry awaits the result of the capital review. Banks across the Tasman continue to adjust to increases in required capital levels and tightening limits on exposure to overseas subsidiaries, which may impact their options or ability to respond to the RBNZ Capital Review.
In other news for the quarter, the RBNZ have commenced consultation on the Financial Market Infrastructures Bill. The bill looks to enable effective monitoring of the entire sector, proposing to grant regulators more investigative powers and enforcement tools on systems and institutions.
While we are yet to see Fintech accelerate at the pace expected, we are continuing to see banks recognise the opportunities and threats posed by new entrants, looking to respond by outsourcing partnerships with or investing in Fintech firms. Buy now, pay later schemes continue to grow, with traditional lenders experiencing disruption looking to respond by entering the market with their own offerings.
As Bill Gates once said, “we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten”.
We are beginning to see a few examples of this activity in the sector. ASB have shown interest, looking to respond to the ‘buy-now-pay-later’ (BNPL) movement by getting involved rather than defending their current position, as demonstrated by a recent partnership with Swedish Fintech bank Klarna. While a Fintech start-up called Choice looks to disrupt the payments sector by using open banking to create a network that directly connects customers’ and merchants’ bank accounts, as opposed to using an intermediary provider (such as PayPal). This will in turn enable Choice to offer low transaction rates, coming at a time where others in the sector have opted to disrupt themselves to avoid being left behind.