Bank profits shrink thanks to low interest rates, rising costs

The big four Australian owned banks - ANZ, ASB, BNZ, and Westpac - continued to dominate the sector. Photo credit: Getty

By Gyles Beckford for RNZ

The profits of the country's banks have fallen by more than a quarter over the past year amid the COVID-19 pandemic, a fall in margins because of low interest rates and higher costs.

Business advisory firm KPMG's latest Financial Institutions Performance Survey for 2020 showed bank profits fell 28 percent on the year before to $4.1 billion, the biggest annual fall in a decade.

KPMG head of banking and finance John Kensington said the banks were in strong financial shape going into the crisis and the impact on their finances was to be expected, but they had fared better than feared because of the strength of recovery in activity.

"They went into it in good shape, but also a lot of the risk resides on the government balance sheet at this stage. The government did a lot such as the wage subsidy which was easy to get ... and it was of an amount that tided people over, which allowed people to keep jobs and most businesses been able to hold on to their staff."

The report put the amount put aside for bad and doubtful debts at $1.47b from $390m, a rise of 275 percent.

However, Kensington said the final cost might not be that high, given the rebound.

"Perhaps some banks will now look at the level of their provisioning and whether or not they have taken too much for what has now transpired so far, although that doesn't mean the situation can't get worse, but it could equally get better."

Interest rate margins - a measure of profitability - fell 14 basis points (0.14 percent) to 1.96 percent, reflecting the fall in interest rates.

Banks' operating expenses also rose sharply, by 9 percent, as banks took on staff and updated systems. Lending across the industry rose 3 percent, just under the growth of the previous year's growth.

The big four Australian owned banks - ANZ, ASB, BNZ, and Westpac - continued to dominate the sector holding close to 90 percent of business, with Kiwibank a distant fifth.

The new normal

Kensington said the banks had done well to support customers and try to live up the Reserve Bank's exhortation to be "courageous" in their lending.

He said it was understandable that at a time of crisis they had exercised some caution, which accounted for anecdotes of difficulty some businesses reported in getting loans.

"The difference between now and the GFC (global financial crisis of 2008/09) that there has been enormous government support and banks are now part of the solution."

But he said banks would have to adapt to new rules being brought in by the RBNZ, and their focus should be on looking to change for new circumstances.

"Climate-related reporting will be another area of change for banks. Other emerging threats include cybercrime. The need to exhibit diversity and inclusion and the continued pressure on conduct and culture aspects should also be on the radar."