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FIPS Quarterly: December 2019

FIPS Quarterly: December 2019

Banks face challenges amid COVID-19 disruption.

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John Kensington - KPMG NZ - Partner

Partner - Audit, Head of Banking & Finance

KPMG in New Zealand

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Results for the quarter

KPMG’s Financial Institutions Performance Survey (FIPS) has revealed a drop in profit for New Zealand banks, with net profit after tax (NPAT) for the sector down 6.86% to $1125.2 million for the quarter ending December 2019. This follows a significant drop in NPAT of 16.53% in the September quarter.

Driving the result was a decrease in non-interest of $291.7 million (34.6%) and an increase in the impaired asset expense of $4.0 million (4.65%). This was partially offset by net interest income up $52.7 million (2.10%), operating expenses going down during the quarter by $154.7 million (9.63%) and a corresponding reduction in tax expense of $5.4 million (1.19%) driven by the lower profit figure.

“While this drop in profit was a reflection of impacts on the New Zealand economy from then-current domestic and international events, subsequently we have observed the previously unforeseen impact from COVID-19 have far more immediate and potentially prolonged and significant consequences,” says John Kensington, KPMG Head of Banking and Finance.

Loan book growth continued in the quarter with loans up by 1.07% to $441,329 million and asset quality had no major movements, with provisioning levels relatively stable in contrast to the previous quarter. Following a downward trend in the previous quarter, the number of new mortgages written over the period increased by 15.5%.

Economic impact of COVID-19

The banking sector is currently facing significant economic implications given the magnitude and speed at which the COVID-19 pandemic is developing both locally and globally. Business confidence is unsurprisingly down, and a significant recession is anticipated. We are seeing large fluctuations in global financial market prices and exchange rates, the deterioration of asset quality, cancelled orders and slower payment cycles.

Regulators have taken some pressure off deadlines for regulatory compliance with new regulatory proposals pending. This presents a welcome relief as banks are stretched dealing with the fallout from COVID-19 and a national lockdown of at least four weeks. They will no doubt use this breathing space to consider their current plans, or review their approach.

“The impact of COVID-19 is understood to be large and wide-ranging but its real impact is still being assessed. Globally, as governments, central banks and regulators act to contain the spread and support their citizens and economies, the only known is the impact will be significant at many levels,” says John. ”What is not known, is how significant this will be in terms of financial and social impact, and indeed the length of time this impact will be felt.” 

Key announcements

The Government, along with the Reserve Bank of New Zealand (RBNZ) have worked quickly in recent weeks to establish measures to support New Zealanders and the economy throughout this period of upheaval.

Government announcements:

  • launch of an economic stimulus package which includes wage subsidies, boosts to the health sector, aviation support and income support
  • escalation to a level 4 alert resulting in a nationwide lockdown for a minimum of four weeks, effective from 11.59pm Wednesday 25 March and closing all businesses excluding essential services
  • Government, retail banks and the RBNZ announce mortgage holiday and business finance support schemes to cushion COVID-19 impacts.

RBNZ announcements:

  • official cash rate (OCR) dropped by 75bps to 0.25%
  • deferral of a number of regulatory initiatives in order to support the economy amid challenges presented by COVID-19
  • implementation of a $30 billion Large Scale Asset Purchase Programme of New Zealand Government Bonds.

 

“The Government, RBNZ and other regulatory announcements are all aimed at trying to manage the wide ranging social and economic impacts of COVID-19 and allow New Zealand to plot a path through and beyond the pandemic,” says John. 

Lending and housing

A 50bps cut in August of 2019 came as a surprise to the market, which had neither anticipated it nor priced it in. However, banks chose to pass only some of this cut onto their customers with rates on the lending side reduced by various levels across the curve.

Over the last few months we have seen signs of the impact of COVID-19 and an associated lowering of rates. The RBNZ has since cut rates by 75bps to keep parity with global interest rate cuts (and prevent accretion in the currency), with banks passing the full 75 bps on to customers on this occasion.

With such low interest rates, as we move closer to zero, increasing pressure is put on banks’ margins. Deposit funding has limits which are required to keep the flow of funds, meaning that banks will only be able to reduce the deposit rates up to a certain point.

Looking forward

As the situation evolves, there will no doubt be further challenges ahead for the banking sector. COVID-19 will continue to test the banks, their customers, the New Zealand Government and regulators for the foreseeable future. Given the severity of the situation, these stakeholders will need to navigate this period of uncertainty together with a mutual understanding and acknowledgement of the issues they and their customers are facing.

Previous reports:

  

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KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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