Banking industry in good shape

By NZPA

Tuesday 24th April 2007

The New Zealand banking industry is in good shape to meet any market shock or slowdown, says KPMG which today published a survey of the sector.

Deputy chairman, financial services Godfrey Boyce said strong loan growth across most segments of the industry and nine-year lows in doubtful debts had driven a record profit for the banking industry in 2006.

That should dispel any concern about the capacity of the banks to meet a market correction, he said.

During 2006, this country's registered banks increased total assets by around 15% to top $275 billion, compared to 8.7% growth the year before.

Most of the major banks had a good year, with an overall 11% increase in net profit after tax, from 4.2% in 2005, Boyce said.
The 2006 growth was a result of the strength of the economy which did significantly better than most commentators expected.

Today's survey reported that total sector net profit after tax crossed the $3 billion mark in 2006. The four major banks -- ANZ National, ASB Bank, Bank of New Zealand and Westpac -- accounted for almost 90% of the total, up from 86% the year before.

Amidst the good news for the banks, Boyce did raise a note of caution, saying pressure to maintain growth rates had pushed banks towards writing a greater proportion of mortgages for borrowers with less than a 20% deposit.

"The banks have become accustomed to loan growth more than offsetting the concessions they've made on interest rate margins as they've fought the mortgage war," he said.

"In spite of a steady rise in underlying profitability over the past 10 years, they can't assume it's going to continue indefinitely."

Figures in the report put total mortgage lending by registered banks up $15.3 billion to $127.7 billion by the end of 2006.

Boyce said issues raised by the Reserve Bank about low interest rate margins were borne out by the survey, with margins contracting in the sector by 17 basis points to 2.35% during 2006.

There was an irony in the Reserve Bank indicating it was considering increasing bank capital requirements to help moderate mortgage growth, he said.

That came at the same time as the banks were moving to implement the Basel 2 Capital Accord which conceptually allowed lower capital levels for retail banks with mortgage portfolios, as they historically had exhibited less credit risk.

Banks were in the business of balancing risk and return, Boyce said.

It would be the requirement to provide their owners with a satisfactory and sustainable return on the capital employed that would ensure the banks lent prudently, and appropriately priced risk.

The survey also found that while banks were offering an ever wider range of products and services, the major banks were adopting a back to basics approach in a quest to lure customers from competitors.

Boyce said the last year had seen the emergence of low fee, "all you can eat" transaction accounts and low interest rate credit card rates.

That was partly a reaction to the fact that previous banking minnows such as Kiwibank, TSB Bank and Rabobank were now strong enough to be noticed by the major banks, he said.

"Pressure from the smaller banks and the intense competition for customers has led the major banks to package deals to attract new customers.

"Now a customer with straight-forward banking needs can have them met with a bank account with fixed annual fees of $60 and a credit card with a 12% interest rate," Boyce said.

"Deals like this tap into the widespread suspicion and dissatisfaction with bank fees and credit card rates that are typically around 20%."

As they adapted to competition, banks were showing the characteristics of a retailer, not necessarily those of a traditional bank.

The emphasis was on creating attractive "shop fronts", in areas where foot traffic counts were heavy, to draw customers in.

Despite the increasing use by customers of electronic banking, sales tended to be made in branches, not over the internet.

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