Highest profit growth on record for banking sector
KPMG’s Financial Institutions Performance Survey (FIPS) Bank review of 2021 has revealed a strong increase in net profit after tax (NPAT), showing the banking sector’s recovery from the initial shock of Covid-19 in 2020.
The results show NPAT up $1.99 billion (47.92%) from 2020 to reach $6.13 billion for the year, marking the first year that FIPS has reported an NPAT of over $6 billion.
The key driver for the increase in NPAT was a reversal in impaired asset expense of $1.69 billion (114.49%) to a $213.43 million impairment reduction in 2021.
In addition, net interest income rose by 7.07% to $765.62 million and non-interest income contributed a 5.94% ($159.08 million) increase. The net interest income increase was driven by a 1 basis point (bp) increase in the Net Interest Margin (NIM) for the banking sector and a 6.55% increase in lending across the sector, fuelled by a strong property and mortgage market.
The increased levels of profit were further influenced by operating expenses (excluding amortisation) only increasing by a marginal $47.21 million (0.80%).
“It might seem counter-intuitive that with all of the challenges, the banking sector performed so strongly last year and posted a record result,” says John Kensington, Head of Banking and Finance at KPMG. “However, we need to bear in mind the following two key factors. Firstly, the economic impact of Covid-19 has been masked by Government financial support measures, a slightly unintended consequence of monetary policy which saw significant amounts of cheap funding available for housing. This gave Kiwis the confidence to continue their love affair with housing at a time when many other avenues for spending were curtailed. These factors saw phenomenal mortgage growth off the back of them.”
“Secondly, the most significant factor in the record result this year has been the reversing of provisions made in the prior year. When Covid-19 first arrived on our shores, banks were required to estimate the impact it might have on their loan losses. As we look back now with the benefit of hindsight, the negative impact of Covid-19 was greatly overestimated, and resulted in provisioning levels that have not been required (to date). A significant part of the banks’ record performance is due to a portion of those prior year provisions being reversed in the current period.”
The ongoing impact of CCCFA changes
The topic that has been the most passionately discussed was the amendments to the Credit Contracts and Consumer Finance Act (CCCFA). When the changes were mooted, two things happened – commentators all agreed with the concept of promoting responsible lending and ensuring no one was harmed but simultaneously issued warnings in advance about the impact the detailed requirements within the code would have on processing times, decision making and ultimately the amount of and cost of lending that would occur.
“The changes have resulting in a slow-down in processing times of loans and an increase in declines, meaning at the very time many sectors of society needed funding it is being turned down.”
Kensington reflects that with a review now in train, “the sector hopes for a transparent and factual approach which leads to a balanced outcome.”
An over-heated housing market
The housing market continued to be a key topic of discussion in 2021, especially the annual house price growth rate of 27%. The housing price increases didn’t deter buyers though, with annual sector lending increasing from $296 billion to $326 billion in 2021.
"Mortgage growth was driven by the availability of cheap borrowing, allowing banks to lend to home buyers at astonishingly low rates. This was possibly an unintended consequence of the Government support through Covid. However it is starting to look like early 2021 was the peak, with many changes to lending and mortgage requirements now enforceable and signs of a slowing of sales and the prices they occur at.”
Navigating living with Covid-19
A prominent and recurring discussion point across survey participants was dealing with Covid-19 as a constant – and the continuous flow on effect for both banks and businesses.
"With the uncertainty of the Omicron outbreak, the balance of health and economic impacts becomes more important than ever. This is illustrated in the recent and significant changes to both the definition of who has to isolate and the length of that isolation, the introduction of RAT tests and the changes made to MIQ being bought forward. A particularly pointy challenge to navigate is workforce management – avoiding situations where entire teams test positive for Covid-19 and have to isolate at once. As with re-opening the border and the economy, this is uncharted territory that will require new and constantly-changing thinking as it evolves.”