Profit growth halts for New Zealand banking sector
KPMG’s Financial Institutions Performance Survey (FIPS) review of 2019 has revealed a decline in profit for New Zealand banks, 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.
Net interest income continued to see strong growth in 2019, up 4.79% ($497m), driven by strong growth in loans of 5.37% slightly offset by Net Interest Margin dropping back 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), more than double 2018’s increase of 3.02%. The increase in total operating expense has been largely driven by an increase in personnel .
“Four factors, including increases in impairments and operating expenses combined with drops in non-interest income and interest margin contributed to the flat profit” says John Kensington, Head of Banking and Finance and KPMG.
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.
“It will be very interesting to track the sectors reaction to the required changes as it has to date been slightly muted” says John.
Conduct and culture remained a key priority in 2019 with many in the sector undergoing reviews of their customer approach. While progress has been made, going forward we can expect to see continuous changes in expectations that banks will have to keep up with, or ideally, ahead of.
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.
“Hopefully positive economic indicators such as the recent infrastructure announcement marks the turnaround point for both the coalition government in terms of its execution of economic policy and business confidence” says John.
Fintech disruption in the banking sector slowed in New Zealand 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 in recent times, disrupting the payments space traditionally dominated by bank funded credit card providers.
Some banks have adjusted to this disruption by joining the party, such as ASB parent company the Commonwealth Bank of Australia investing in Klarna, a BNPL provider based in Sweden. Klarna is already operating across the Tasman and is pinned to arrive in New Zealand in 2020.
Looking forward, Open Banking is an area where we expect to see progress increase in 2020. While the concept is gaining traction overseas, progress in New Zealand has been slow and largely industry led, despite support from the Minister of Commerce and Customer Affairs, Hon Kris Faafoi. 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 speed of adoption.
“How the sector proceeds with open banking will be interesting. Will it be forced by regulation rushed with some downstream issues or driven off the back of customer centric innovation and protection? Will regulation or innovation be the pathway?” Say John.
The introduction of Open Banking to New Zealand would allow individuals to switch providers more readily as well as enabling other industry players to access key financial data, ultimately resulting in more choice for consumers and increased competition in the market.
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