Results for the year

2021 shows mixed results as New Zealand businesses navigate the new-normal of operating in a Covid-19 environment. Notably, the sector has experienced lending growth of less than 1% - the lowest seen since 2010 in the aftermath of the GFC.

The Survey also reports decreases in both net interest income and non-interest income, down 8.27% and 10.86% respectively, and a 5.69% reduction in interest margins of 66bps, the lowest seen in the Non-bank Survey’s 11-year history. Average funding costs also decreased, down 2.18%, or 115bps.

The sector also experienced a 10% ($97m) drop in operating expenses.

Impaired asset expense has also decreased, dropping 34.14% ($59m) in 2021 after the 41.51% increase in impaired asset expense in 2020. The economic uncertainty surrounding the Covid-19 pandemic and industry concerns over increased risk of future default has subsided significantly this year, leading to a decline in impairment provisions and impairment expenses in 2021. Impaired asset expense as a proportion of gross loans and advances (GLA) has, understandably, decreased considerably from the height of provision of 1.22% in 2020, down 42bps to 0.8%.

These conflicting impacts combined to deliver a 3.24% overall increase in net profit after tax (NPAT).

“The ability to still manage positive movement in NPAT reflects how the sector has rethought their processes due to Covid-19, and made tough decisions to streamline their businesses and eliminate unnecessary expenses due uncertainty over what the future might hold,” says John Kensington, KPMG’s Head of Banking and Finance. “At the same time most entities have held onto some degree of provisioning overlay, again due to this uncertainty.”

From eliminating to living with Covid-19

A prominent and recurring discussion point across survey participants was around New Zealand’s path out of Covid-19 restrictions and how we can deal with Covid-19 on an ongoing basis.

Real concern was expressed about entering the traffic light system on 3 December leaving just 22 days for the economy to get moving before the holiday period. The question many ask is whether these businesses will be able to sufficiently get up and running again to be in a position to recoup the losses from being locked down for significant periods of time.

“The sector can’t help but hold concern for what may happen to those large number of (inner-city) businesses that had been without foot traffic for over 100 days. And crucially, will they be able to access the cashflow they need to recover?”

The unintended consequences of CCCFA

While the Credit Contracts and Consumer Finance Act (CCCFA) regulations are based in sound logic of ensuring responsible, integrity-driven lending, Survey participants foresee a number of unintended consequences, such as higher costs to the lending process which will ultimately be built into interest rates, an increase in loan declines by 20-25%, and an increase in loan approval times by 25-50%.

“What we will inevitably see is higher-tier lenders having to say no to some of their clients, forcing these borrowers to seek out lower-tier lenders to get the finance they need, and with that their borrowing costs will increase,” reflects Kensington. “And borrowers who find themselves with no option left in the market may go to unscrupulous and unregulated lenders, where the unintended consequences of CCCFA will be at their most severe.”

Survey participants also saw CCCFA as restricting lending at the very time when New Zealand needs funding to move out of lockdown.

Kensington reflects that “many businesses have been operating in survival mode, particularly those in Auckland, for more than 120 days. They urgently need access to cashflow to get back to full speed as the country opens up and we begin to rebuild.”

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