Bank profits slump 90% as impaired loans top $2.2 billion in 2009

Tuesday 27th April 2010

New Zealand’s banks recorded a 90% slump in net profit last year as deteriorating asset quality driven by the worst recession in 18 years and a meltdown in the property sector saw impaired loans soar.

The 15 banks that service New Zealand made a combined net profit of $299 million in 2009, down from $3.07 billion a year earlier as impaired rose to $2.2 billion from $639 million, according to the KPMG Financial Institutions Performance Survey. Also, the biggest lenders were saddled with $2.1 billion in taxes owed on structured finance transactions. Excluding the one-off tax provisions, underlying profit dropped 26% to $3.2 billion.

Lending growth slowed to 2.7% as lenders shied away from riskier propositions and banks boosted their net interest margin by 3 basis points to 2.1%, though this was offset by higher funding costs.

KPMG head of financial services Godfrey Boyce told a briefing in Wellington that the major issue for banks was rebalancing their funding lines from offshore wholesale credit lines to domestic sources, and retail money was now more expensive than wholesale, with the 90-day bank bill 190 basis points above wholesale rates.

“It’s important to rebalance offshore and onshore” sources of funding, Boyce said. “Banks got very uncomfortable with how expensive it got in the December 08 quarter” when the global financial crisis hit its peak, he said.

Boyce said the banks are reducing their reliance on offshore funding, which fell to 38% last year from 39% in 2008 by offering higher premiums on term deposits. His main concern here is that there isn’t enough wealth in New Zealand to keep cutting offshore funding, with each percentage point tapping the market for about $3 billion.

The banks had achieved the 65% core funding ratio required by the Reserve Bank of New Zealand, and Boyce said this was the first time it had been achieved in the past decade. Lenders weren’t sure whether they would be able to meet a 75% ratio that has been earmarked for 2012, he said.

The ratio, which requires banks to source a greater percentage of funds from domestic and short-term wholesale funding, has been flagged as a means to reduce volatility in New Zealand’s financial system, and central bank Governor Alan Bollard says it will limit the need for him to lean on the official cash rate during expansionary economic periods.

Boyce said the rural sector and leveraged small and medium enterprises (SMEs) would be a risk to lenders in the coming year, though the banks were taking precautions and limiting their exposure to these areas.

Businesswire.co.nz

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