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Weak lending takes pressure off banks' funding needs this year, PwC says

Friday 10th February 2012

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Banks will be able to self-fund their operations through 2012 because ongoing weak lending demand and savings growth means retail deposit funding will grow faster than lending, according to a report by PwC.

But static lending growth hasn’t stopped banks expanding net margins, and they experienced 25 percent profit growth across the sector in the second half of the last financial year, compared with the first half, the global accounting firm says in a six monthly report on the country’s five major banks.

Looking ahead, the protracted Eurozone crisis seriously clouds the horizon.

“The banks’ sunny spell since 2010, brought on by improving net interest margins and reducing bad debt expenses, is now threatened by conditions that could be as bad as the 2008 GFC,” says PwC financial services partner Sam Shuttleworth.

Still, profitability improved in the latest period across the five banks the report covered in the Banking Perspectives report: Australian-owned ANZ National Bank, ASB, Bank of New Zealand, Westpac, and New Zealand government-owned Kiwibank.

Compared with a year earlier, bad debts had fallen by $400 million, approximately 35 percent, despite ongoing fall-out from the recession and Christchurch earthquakes.

The banks’ combined pre-tax “core” earnings in the second half of the 2011 financial year totalled $2.8 billion, up from $2.3 billion in the first half, “driven by increasing net interest income, growth in other operating income, and a modest reduction in operating expenses.”

It finds lending portfolios remained flat for another six months at $276.3 billion, but the banks are now managing to drive profits where previously they weren’t.

Net interest income increased by 7% to $3.6 billion in the second half, compared to the first, “principally through an improving net interest margin”, up four basis points to 2.27 percent, slightly below the 2.29 percent average achieved by their Australian parents.

“The Eurozone sovereign debt crisis could have a major impact on our major banks’ net interest income levels, given the cost of international wholesale funding is likely to increase unless the banks can pass on these costs to their borrowers,” Shuttleworth said.

 “Banks are preparing for a challenging environment by stepping up their focus on driving efficiencies and reducing costs”, with focus on digital technology to improve customer experience while saving costs a key factor, although branch banking still had an important place.


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