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Banks earn well in 2010 but future looks tough

Monday 14th February 2011

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New Zealand banks earnings are expected to remain under pressure going forward due to a variety of reasons including limited balance sheet growth, increased regulatory requirements and funding pressures.

In a report analysing the performance of the five main banks in the second half of their 2010 financial year, PricewaterhouseCoopers noted that banks reported solid profits in the second half of their 2010 financial year but face many challenges going ahead. The five banks are ANZ National, Westpac, ASB, Bank of New Zealand and Kiwibank.

"The steady source of interest income and profit growth over the last decade looks to be coming to an end for the banks, or at a minimum, a partial hiatus. Only a fast return to strong GDP growth will right this current trend," the report said.

Banks reported a strong increase in net interest income in the second half but PwC said maintaining this strength would remain a challenge due to limited balance sheet growth and as majority of loan repricing is now complete. Adding to the pressure on net interest income would be rising funding costs due to competition for global funding, mainly long term funding as Basel III becomes an additional burden.

Banks may not find respite on the bad debts front also as high levels of 90-day past due loans mean that write-offs are unlikely to return to levels seen before 2007. In the recent half year period, bad debt expenses nearly halved to $364 million compared to the first half.

While all these trends will keep pressure on earnings, PwC said the going will get tough because of tight labour markets and other inflationary pressures.

To counter this, banks will need to find innovative ways to connect with customers to drive growth in revenue and core earnings, PwC said, adding that investment in technology is one of the ways of doing this.

"Improving efficiencies is critical, and one of the reasons why the banks' technology plans to generate efficiencies in back-office processes are so important," the report said.

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