Banking sector under pressure

Tuesday 3rd May 2011 1 Comment

The banking sector remains under pressure from debt reduction, rural sector debt, general economic uncertainty and the unknown impact of the two Christchurch earthquakes, a new report shows.

KPMG's annual Financial Institutions Performance Survey, published today, said that despite the pressure, the banking sector had posted a significant return to profitability in 2010.

It put the number of registered banks in 2010 as unchanged at 19, while the number of finance companies fell to 16 from 31 in 2009.

The decline in finance companies was the result of continued finance company failures and receiverships, along with some integration and consolidation. More amalgamation was expected in the sector, the report said.

KPMG acting head of financial services John Kensington said that compounding uncertainty in the sector were regulatory pressures, particularly anti-money laundering legislation, financial services regulation and core funding requirements.

Deleveraging was the big story of 2010, Kensington said.

"Market participants were surprised at the scale of deleveraging. Households were reducing debt over a long period of time and the deleveraging is multifaceted and occurring at almost every level of the loan book.

"As a result, all of the banks struggled to write new business and meet volume and dollar targets," Kensington said.

"Uncertain economic conditions, the softness of the recovery, and deleveraging means banks will continue to work hard to grow their loan book in the near term."

At the same time, banks' revenue channels were under pressure.

Net interest margins were again being squeezed, a result of the retail deposit wars of the first half of last year, Kensington said.

The impact had been more pronounced on the big five banks, who lost 10 basis points and saw their margins reduced to 2.09% last year.

The banks were actively managing their rural assets, rather than forcing a sale in the current market.

Despite high commodity prices, it would still take many years for the sector to reduce debt to a level deemed satisfactory to its lenders, or the Reserve Bank, Kensington said.

The Reserve Bank was considering a capital overlay because of concerns at the level of rural debt, which remained around $47 billion, despite many in the sector reducing their exposure.

The report said the overlay was likely to force the banks to hold more capital against their rural loan book.

Kensington considered the biggest uncertainty on the path to recovery for the banking sector was the as-yet unquantifiable impact of the Christchurch earthquakes.

All the banks would suffer some losses, but the bigger impact would be the residual effects on the regional and national economies, further delaying recovery and compounding banks' weak lending growth in the coming year.

NZPA

Comments from our readers

On 4 May 2011 at 9:25 am Simon said:

OK, am I going blind? Or can I not see the name of the author on this article? - So are you saying then that the banking sector here is under pressure and that it may be in danger of collapse? For those who are sitting on deposits with NZ banks for the purpose of supporting NZ economy in general are they safe? I mean those with substantial amounts, higher than the government guarantee amount? Is it true that there is 1.6billion in mortgages in NZ at the moment? Does that mean that there is actual security worth that much to back the loans? Is the full amount borrowed from off-shore lenders and is it safe? Too many questions not enough answers. Surely it cannot be that difficult for the government to quantify the amount it may take to rebuild the stricken Canterbury area, the financial ability of the ministers in power should be enough to be able to do that, and if not, why not? They allegedly earn enough money from the tax payer to be able to pull the stops out in times of need and produce results. We want to be sure that our money and financial hub in NZ is safe and that we can trust it.