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Shareholder pressure on banks expected to grow


Friday 5th August 2011

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Shareholder pressure on major banks is expected to grow after a fall in returns on equity.

An analysis by PwC of the first half of the 2011 financial year at the banks -- ANZ National, ASB, Bank of New Zealand, Kiwibank and Westpac -- said the major banks were in a difficult situation.

With returns on equity falling by four percentage points in the past three years to 12.9 percent, there was likely to be increasing pressure from shareholders, with the most obvious controllable area being costs.

But many banks needed to replace key systems in order to remain competitive in the technology-driven modern banking marketplace. Regulatory and compliance requirements also continued to increase.

The PwC -- formerly PricewaterhouseCoopers -- New Zealand Banking Perspectives analysis said the five major banks had a 2 percent rise in core earnings in the first half of their 2011 financial years.

The banks’ combined core earnings in the half year was $2.3 billion, up from $2.2 billion for the second six months of the 2010 financial years.

That was driven by increasing net interest income and growth in other operating income, offset by a rise in operating expenses.

As a result of the Christchurch earthquakes a decline in bad debt expenses seen since the second half of the 2009 financial year had halted. Overall, that left the profit before tax largely unchanged at $1.9b, compared to the 2010 second half.

PwC financial services partner Sam Shuttleworth said that with the four Australian-owned New Zealand banks being downgraded by Moody’s in May due in large part to their reliance on overseas funding, increased pressure was being put on interest margins.

There were also concerns impending reviews by Standard & Poor’s may lead to a further credit rating downgrade.

"Any impact that does arise from these downgrades will put further pressure on the banks’ net interest income," Shuttleworth said.

That pressure would be especially unwelcome with balance sheet growth stalled and the re-pricing of loans onto wider spreads which followed the global financial crisis arguably coming to an end.

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