KPMG’s Financial Institutions Performance Survey reports a slight dip in banks’ profits for the quarter ended June 2021, down 11% to $1,451.9 million. However, this is compared to the previous quarter (March 2021) which saw a record-breaking profit of $1,642.9 million. June 2021 was still one of the strongest quarters ever and saw almost double the profit of the same time last year (though the quarter ended June 2020 was the one most impacted by Covid-19).
A slight reduction in non-interest income of 21.47% contributed to the decrease in profit, but this is always a volatile component. Operating expenses also increased this quarter (up 11.11% to $1,531.6 million), in part due to an increase in hiring to support large-scale technology transformation and regulatory change programmes which require specialist skills.
The gradual release in provisions continued, but some organisations are still recording impairment expenses, demonstrating that a degree of uncertainty remains. Collective provisions are being released, but individual provisions are now starting to increase as banks receive better information around which sectors are likely to be most affected by the tail of the Covid-19 impact.
John Kensington, KPMG’s Head of Banking and Finance, says, “The June quarter broadly saw a continuation of trends that have existed over the last few quarters, such as strong profits, high mortgage lending and a continued focus on regulation. The September lockdown has since added new uncertainty and the RBNZ’s upcoming decisions and timing thereof around OCR and LVR lending will have an impact on the future.”
Lending fuelled by mortgages
Growth in mortgage lending has once again driven the strong result. Lending overall increased by 2.2% from the previous quarter to $473,671 million, but this rose to 6% for mortgage lending specifically. Each month of the June 2021 quarter saw over $8 billion of new residential mortgage lending, though March 2021 still retains the highest record for mortgage lending in one month. Consumer, business and agriculture lending, on the other hand, decreased in the quarter. Owner occupiers and first-time buyers (FTBs) fuelled the quarter’s mortgage lending growth, with over 9,000 FTBs stepping on to the property ladder. This is the second highest number on record. John Kensington says, “It’s possible that these are the first signs of recent tax changes coming into effect. Leveraged investors may be deterred by the tax changes, or by yields from renting looking less attractive at such high purchase pricing. There is evidence that the market has started to slow slightly, so we may see fewer of these mortgage lending records.”
Regulation and remediation
Regulation continues to be a major focus area, with significant programmes of work at the banks. The next on the agenda is due 1 October (pending potential delays due to lockdown) with the implementation and amendments to the Credit Contracts and Consumer Finance Act 2003.
This quarter has continued to see reports of regulatory breaches, some necessitating remediation payments or civil penalties. Yet the overall concentration on good customer outcomes in much of the recent and upcoming regulation has seen compliance move from ‘tick-box’ frameworks to a focus on culture.
New technology and products are also creating an ‘innovation versus regulation’ debate within the financial services industry, on the back of Buy Now, Pay Later (BNPL) gaining both popularity and attention.