New Zealand bank profits fell slightly in the December quarter from the record results in the previous quarter even as their net interest margins - the difference between the interest they generate and what they pay out to lenders - rose.
KPMG's quarterly Financial Institutions Performance Survey (FIPS) shows the New Zealand banking sector decreased net profit overall, down 8.3 percent, or $103 million, to $1.15 billion, compared to the September quarter, when it rose 11.5 percent.
Intense competition for loans, which has seen banks offering iPads, televisions, free valuations and cash to entice mortgage lenders and reduced rates to get corporate customers, had little impact on interest margins for the quarter which collectively rose 2 basis points to 2.34 per cent.
KPMG head of financial services John Kensington said all the banks increased both their interest income and interest expense over the quarter, due to growth in both total lending and customer deposits. But more importantly, they also lifted net interest income because interest income was larger than the increase in interest expense. TSB Bank was the only exception to that.
Across the sector, five of the nine survey participants recorded increased net profit with the overall decrease primarily due to a 9.2 percent and 7.9 percent fall in net profit at the country's largest and third largest banks, the ANZ New Zealand and Bank of New Zealand, respectively. That was mainly because of unfavourable movements in hedging activities and financial instruments.
TSB Bank faced the most significant profit reduction - a loss of $18.3 million after a $53.9 million write off on Solid Energy bonds. Heartland New Zealand and the Co-operative Bank showed the most improvement during the quarter at 4.62 per cent and 34.31 percent respectively.
Kensington said overall the banking sector remains in good health with the quarterly decrease following the strongest ever quarter in September, and this quarter remains the second strongest since the survey began.
The main impact was the banks not having as much excess bad loan provisioning to claw back due to growth in their loan books and impaired asset expense rising by $61.9 million. There was also an impact from volatility in the fair value gains and losses on financial instruments with the strong kiwi dollar and low interest rate environment.
The strength of the banks is a lead indicator for the general healthy state of New Zealand's economy which has transitioned from 'rock star' to what industry experts coin the 'Goldilocks' economy with solid, though not exceptional growth which is still strong compared to other international economies, Kensington said.
"If the banks are doing well, people in the general economy are starting to borrow to invest in their personal or business needs. It's a lead indicator for the economy and reflects low unemployment and confidence which is hugely important," he said.
The housing market continued to grow despite the Reserve Bank's loan to value restrictions with a 1.5 percent lift in gross loans and advances in the December quarter to $330.6 billion, the largest quarterly movement since the same quarter in 2012. While all banks grew their loan books, Kiwibank had the best improvement, up 2.2 percent. High LVR lending reduced by 2.65 percent over the quarter and 8.23 percent over the past six months.
There's been a big move away from floating to fixed rates in the past two years, although banks prefer floating, with one to two year fixed rate mortgages becoming more prevalent. Since February last year, one to two year fixed rate mortgage lending has risen from $32.9 billion to $54 billion while floating loans have fallen from $76.1 billion to $54.9 billion over the same period.
Kensington said the biggest threat facing the banking sector was the prospect of continued low dairy prices with the farming industry able to withstand one season's poor payout but it would start to see some pain if that continued for two.
"After two years of good payouts people have been repaying debt so across the sector average debt is not so bad. But people who recently moved into the sector that have paid high prices for land or a farm and done that through debt, have exposure if commodity prices stay low."
Agricultural lending had the highest year-on-year growth during the quarter of all loan types, rising 4.3 percent in December compared to 2.9 per cent in the September quarter.