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Banks show real growth after long adjustment

MEDIA RELEASE – 4th March 2014

FIPS Financial Institutions Performance Survey review of 2013

Banks show real growth after long adjustment

Strictly embargoed until 6.00am Tuesday 4th March 2014

New Zealand’s banking sector had a solid 2013, with the slow economic recovery picking up the pace and beginning to flow through into results, KPMG’s latest Financial Institutions Performance Survey shows.

Profits rose 8.61% across the banking industry in 2013, with an increase in lending assets of 4.35%. Return on assets recovered to 1.0%, now sitting just below the level last seen before the global financial crisis (GFC).

Return on equity remains at 14.21%, similar with 2012. Crucial to the post-GFC adjustment, impaired asset expenses dropped $153 million from $659 million in 2012 to $506 million a decrease of 23.21%. This is now the fourth consecutive year impaired asset expenses have declined.

“There are strong, green shoots emerging now,” says KPMG head of financial services John Kensington.

"Our banks saw real loan growth on their balance sheets in 2013. Most worked hard to improve their profitability, achieving this through a combination of margin retention, a drop in the cost of funds, improved credit quality and pressing on with cost reduction initiatives in their organisations.

"Shielding these 'green shoots' from the frost of regulatory reform is likely a challenge for 2014. The Reserve Bank's restrictions on high LVR lending, anti-money laundering legislation coming on-stream and Foreign Account Tax Compliance Act (FATCA) reporting have all proved burdensome for our banks in 2013.

“In addition the change from floating to fixed mortgages and competition across the sector will be a challenge.”

Within the sector, competition intensified over 2013, as banks competed harder for ‘good customers’. This is set against a backdrop of historically low interest rates and the anticipation that these low rates will soon end.

Strong growth in retail deposits indicates that banks are less reliant on the wholesale debt markets as they look for more stable sources of funding.

The themes of the year was certainly the adjustment to the Reserve Bank’s new loan-to-value ratio (LVR) rules, an adjustment which has been long and involved for both banks and customers.

“Before the LVR rule change the banks were probably writing 20 to 30 percent of theirmortgages a month with a greater than 80 percent LVR, now, they’re probably writing 4 to 6 percent of them with a greater than 80 percent LVR. In short, there’s going to be spirited competition for anyone who’s a good loan, be it a household mortgage or a corporate.

“For our banks, the feeling is if markets global markets particularly don’t have an upset, the funding costs will remain suppressed and this will help them retain their margins in 2014.”

To find out more about FIPS go to kpmg.com/nz/fips2013 [URL available from March 4th06.00am]

Ends

Link to a short video interview with John Kensington – KPMG Head of Financial Services

John Kensington video

About KPMG’s FIPS Review of 2013

FIPS Review of 2013 provides an in-depth analysis on the performance of New Zealand’s registered banks, major finance companies and savings institutions with balance dates between 30 September 2012 and 30 September 2013. A combination of quantitative and qualitative research is used to compile our analysis which takes information from publicly available annual reports and disclosure statements and validates this through nearly 30 one-on-one interviews with senior leaders within the banks and finance companies. We partner with and work alongside Massey University for the data collection and analysis.

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