New Zealand banks' profits drop 20.4% in Q1

Lending remained strong in Q1 but recorded dramatic plunges in April and May.

New Zealand’s banking sector saw its profit plummet by 20.41% or $229.6m to $895.6m in Q1, KPMG’s Financial Institutions Performance Survey (FIPS) revealed. Driving the result was the large increase in impaired asset expense, which skyrocketed 731.63% to $659.2m during the quarter.

This was partially offset by non-interest income of $401.9m, which was likely to have been impacted by the volatility in the market due to the increasing uncertainty of the COVID-19 pandemic.

Operating expenses also went up by 8.9% YoY or $129.2m during the quarter. This was mixed across the sector with some banks reporting reduced operating expenses, such as ASB—down $27m—whilst others reported increased costs, such as Bank of New Zealand (BNZ)—up $166m.

The pandemic’s claws have yet to be reflected in these soaring costs and dwindling profits, and further challenges should be expected in the path to recovery, noted John Kensington, KPMG Head of Banking and Finance.

“The visible impact of the COVID-19 pandemic has only just started to be seen on the sector result and there is no doubt there will be further challenges to come. What no one can say with certainty is the form of the recovery—will it be a V, a W, or some other shape? So many unknown factors impact the answer here, will there be a second wave, when will local and global borders reopen and how much is dependent on a vaccine and when can we expect one?” said Kensington.

“What is clear is that this is uncertain, and the new normal is causing people to reassess how they act across all aspects of their lives (such as personal, business, social) and there will inevitably be a ‘reset’ of all the ways we interact,” he added.

Whilst provisioning increased and the trajectory was clear at this early stage, the true economic impact of the crisis will reveal itself over the next 3-4 quarters, according to KPMG.

“New Zealand is fortunate for two reasons; that comparatively the New Zealand banking sector was in a strong position going into this crisis and that the Government, Treasury, Reserve Bank of New Zealand (RBNZ) and the sector as a whole are all working together to guide the country through the ongoing disruption,” said Kensington.

Lending holds on
On the upside, lending remained strong for the quarter, rising 1.27% or $449.9m compared to Q4 2019 and up 4.64% QoQ compared to a year earlier.

However, things don’t look so great for Q2: lending plunged 57% in April compared to March. Although lending has began to bounce back in May, values are still down 30% from March and 34% compared to May 2019.

The reduction in the OCR alongside global rates falling has contributed to a mini ‘mortgage war’ with New Zealand banks offering historically low rates, noted KPMG.

“The two standout points coming out of the survey information and post period data is that firstly, as the impact of the lockdown took effect, retail lending volumes dipped to 50% of their normal levels in April and have bounced back to about 75% in May and secondly mortgages rates are now at all-time lows,” said Kensington.