KPMG’s Financial Institutions Performance Survey (FIPS) reports have provided insights into New Zealand’s financial services sector for over 30 years. Each edition presents industry commentary and analysis on the performance of New Zealand registered banks, together with a range of topical articles from industry experts, regulators and our own business leaders.
Results for the year
Profit growth halted for New Zealand banks in 2019 with net profit after tax (NPAT) for the sector down 0.99% to $5.71 billion. The result comes off the back of two consecutive years of steady profit growth with increases of 7.35% in 2017 and 11.21% in 2018. Four factors, increases in impairments and operating expenses combined with drops in non-interest income and interest margin contributed to the flat profit.
Net interest income saw strong growth, up 4.79% ($497m), driven by growth in loans of 5.37% slightly offset by net interest margin dropping 2 basis points (bps) to 2.10%. However, this growth was offset by a drop in non-interest income by 3.99% ($130m), an increase in impaired asset expense of 51.48% ($133m) and a large increase in total operating expenses of 6.70% ($360m), over double 2018’s increase of 3.02%. The increase in total operating expense has been largely driven by an increase in personnel.
Capital changes and business confidence
New capital requirements continued to grab headlines with the Reserve Bank’s much-anticipated decisions released in December. The decisions were largely in line with proposals, however key changes included slightly higher capital levels for larger banks than initially proposed, an extension of the transition timeline from five to seven years and the ability to use additional types of tier one capital.
Despite positive economic indicators such as low interest and unemployment rates, business confidence has been down over the past year. While the cause of this is unclear, it is possibly a reflection of some uncertainty stemming from Government resulting in mixed messages. It is possible however that indicators such as the recent infrastructure announcement will mark a turning point in confidence.
Fintech and Open Banking
Fintech disruption slowed in 2019, with some fintech companies taking small bites out of the market but no major upheavals. However, Buy Now, Pay Later (BNPL) schemes have seen huge growth recently, disrupting the payments space traditionally dominated by bank funded credit card providers. Some banks have adjusted by joining the party, such as ASB investing in Klarna, a BNPL provider based in Sweden. Klarna is pinned to arrive in New Zealand in 2020.
Open Banking progress in New Zealand has been slow and largely industry led. With industry leading the charge, banks are essentially disrupting themselves by enabling Open Banking. This comes in contrast to the regulatory-led approach taken in Australia that has seen much faster adoption. The introduction of Open Banking would allow individuals to switch providers more readily as well as enabling other industry players to access key financial data, resulting in more choice for consumers and increased competition in the market.