KPMG’s analysis of the banking sector’s quarter ending December 2021 shows another record profit result, with a 10.2% increase in Net Profit After Tax (NPAT) to $1.61 billion, the second largest quarterly increase ever.
The firm’s Financial Institutions Performance Survey report shows that the strong result was primarily driven by large decreases in operating expenses, particularly from three of the larger banks, highlighting a continued focus from banks to control costs and that certain expenditure can’t naturally occur within Covid-19 restrictions.
Operating expenses/operating income decreased to the second lowest level since the Covid-19 pandemic began, falling from 43.1% in the September 2021 quarter to 39.7% in the December 2021 quarter.
The increase in net profit was also supported by an increase in net interest income of 3.05% to 2.9 million, driven by continued grown in gross loans and advances partially offset by slightly lower interest margins. Gross loans and advances increased by 1.63% to $487.6 billion.
There was a 5.3% reduction in total loan provisioning down to $2.44 billion, reflecting a 3.3% decrease in collective provisioning and a 17.1% decrease in individual provisioning. These reduced provisioning levels led to a fifth consecutive quarter of net impairment writebacks as provisions raised near the beginning of the pandemic continued to be unwound.
Triple threat of inflation, interest rates and lending regulations
While the results reported for the December 2021 quarter are strong, since then New Zealand has seen both inflation and interest rates rise significantly, and quickly. At the same time, lending rates have slowed slightly as a result of loan to value rations (LVR) restrictions and the impact of the CCCFA regulations. Housing prices have dropped and at the time to settle has extend. Lastly with this, general business confidence has fallen.
John Kensington, KPMG’s Head of Banking and Finance reflects that none of these changes are conducive to strong banking results.
“It’s going to be interesting to see how this plays out,” says Kensington. “This will be the first time in a long time where the stars have aligned in a negative way, and it looks to be a challenging time ahead for the sector.”