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NZ banks likely to scale bank lending growth in 2017 as margin squeeze hits bottom line

Thursday 16th February 2017

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New Zealand banks are likely to wind back the pace of new lending this year as a margin squeeze caused by higher capital requirements for the big four Australian-owned banks and greater use of more expensive wholesale funding weighed on lenders' profits last year. 

The country's licensed lenders grew their loan books at the fastest pace in eight years in 2016, with $393.6 billion of loans and advances as at Dec. 31 from $364 billion a year earlier, according to KPMG's financial institutions performance survey. Still, skinnier net interest margins of 2.18 percent compared with 2.28 percent a year earlier, meant net profit fell 6.5 percent to $4.84 billion across the sector. 

While customer deposits rose 8.1 percent to $287.5 billion, it wasn't big enough to fund the credit expansion and lenders turned to wholesale funding lines overseas which were more expensive in what remains a low interest rate environment. 

Bank executives spoken to by the report's authors said the more expensive wholesale funding will be compounded by increased lending restrictions and capital requirements imposed on the big four Australian-owned banks' parents, which will see them "return billions of dollars in funding to their Australian parents over the next few years". That's expected to "slow lending growth in the upcoming year," the report said. 

This week ASB Bank chief executive Barbara Chapman noted the narrowing margins when the lender reported a 6 percent increase in first-half profit, saying deposits weren't keeping pace with credit growth. Just three banks were able to widen their margins in 2016, Industrial and Commercial Bank of China (New Zealand), which its margin by seven basis points to 0.89 percent, and the New Zealand branches of JP Morgan Chase Bank, which increased it by eight basis points to 0.85 percent, and Hong Kong and Shanghai Banking Corp, which eked out a three basis point gain to 1.85 percent. 

NZX-listed Heartland Bank retained the widest margin at 4.79 percent, down from 4.89 percent a year earlier. 

In 2015, New Zealand's lenders reaped their biggest margins in nine years in a period of strong lending growth, primarily in the residential and agricultural sectors. Since then banks have become more wary about the rural sector after a slump in dairy prices meant many farms faced another year operating at a loss, although dairy prices have since recovered somewhat. 

At the same time, the property market has slowed down after the Reserve Bank imposed new curbs to cool investor demand, which was seen driving up prices at an unsustainable pace, taking advantage of a housing shortage during a time of rapid population growth. 

The lenders themselves adopted tougher criteria, and ANZ Bank New Zealand chief executive David Hisco went as far as writing an op-ed piece in the New Zealand Herald newspaper last July warning property prices were overcooked.

The banks' executive said they faced a "tough predicament" in the public eye over interest rates when the Reserve Bank lowered the official cash rate last year, as "they were unable to reduce deposit rates due to a decline in the volume of deposits because of already low rates, and at the same time they could not reduce home loan rates any further as they were already under margin pressure and starting to hit ROE (return on equity) and ROI (return on investment) limits."

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