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.
Covid-19 has had a significant effect on the results of the banking sector, with net profit after tax (NPAT) down 27.6% - the largest profit decrease captured by the survey in the past 10 years. This can partially be attributed to a rise in gross lending of only 2.95%, net interest margins falling 14 basis points and a 9% increase in operating expenses. There has also been regulatory impost brought on by the additional reporting of Reserve Bank during this period and the banks getting ready for regulatory change that are coming in the future.
However, the biggest impact on profit has been an increase in the impaired asset expense, which is up a whopping 275%. This expense is calculated by models that use at forward looking indicators, a few of which were reasonably negative around factors like house prices and unemployment, and subsequently produced a big impairment expense. When comparing that expense to the bank’s actual loan book, the banks have seen relatively low levels of past due or impairment, indicating it is the model driving this increase.
Covid-19 has had non-financial impacts on the banking sector. There has been an increased focus in looking after people - both staff and customers. There has been the implementation and adoption of a large amount of technology, particularly in the areas of remote working and cyber security. And there has been a greater focus on wider reporting. In the past, profit has been the key metric for this industry, however the pandemic has caused leaders to place a greater focus on things like climate, environmental, sustainability and diversity. These elements are starting to come up into the reporting regimes, pushing banks to think about how they should measure and report on them.
There are four factors that have allowed the New Zealand banking sector to remain resilient throughout Covid-19. Firstly, we came into the Covid pandemic with the financial sector, and the general economy, in a very strong position. That can be attributed to a combination of things we learnt post the GFC, regulation that had been put in place and some careful and controlled behaviour by the sector participants.
Secondly, the Government support packages. They were fast, easy to access and, probably with a bit of hindsight, generous. They allowed people to keep jobs and tide over that lockdown period until businesses could get going again.
Thirdly, we had some speedy and empathic responses from the banks through customer-centric initatives including; offering full mortgage deferrals or interest only payments, providing overdraft extensions with an interest free period and introducing free overdraft facilities for those who did not previously have one.
Lastly, it’s undoubtedly been New Zealander’s ability look at the position they’re in, modify their behaviour and be strong enough to get through the initial impacts of the pandemic, with the help of the support packages.