Bank profits fall from record highs but performance remains strong

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Banks' profits have fallen from record highs on the back of higher costs and a dip in income from non-lending sources.

The central banks expects unemployment to hit between nine and 12 per cent this year.

KPMG's Financial Institutions Performance Survey report shows banks' collective profits for the three months ended June fell 11.6 per cent to $1.45 billion.

KPMG head of banking and finance John Kensington said notwithstanding the fall in sector profitability the overall performance remained strong.

"The strong result was largely driven by continued strong mortgage growth and the margin stability or slight strengthening which has continued for two consecutive quarters."

Overall lending was up 2.2 per cent on the previous quarter to $473.7b, but mortgage lending rose 6 per cent, with more than $8b worth of new home loans being made each month in the quarter, with much of it going to first home buyers.

"It's possible that these are the first signs of recent tax changes coming into effect. Leveraged investors may be deterred by the tax changes, or by yields from renting looking less attractive at such high purchase pricing," Kensington said.

Home lending made up just under 64 per cent of total lending in the June quarter compared with nearly 59 per cent two years ago, while business and agriculture lending had fallen to 32.4 per cent from 36.8 per cent in the same period.

However, Kensington said not too much should be read into the drop, especially with Covid-19 affecting the way business was being done.

"Corporates may not be borrowing as much because of uncertainty, and perhaps because of supply chain issues they may not need to borrow for stock they cannot get, but houses are very attractive, with prices rising and interest rates low."

Shrinking consumer borrowing also likely reflected, to some extent, the various Government Covid-19 support programmes to households.

Banks had also maintained or slightly increased their interest rate margins, but operating expenses were 11.1 per cent as banks hired more staff and upgraded systems to do more business digitally, and cope with greater demands from regulators.

At the same time the amount set aside for bad and doubtful debts had reduced.

Income from sources other than lending was a factor in lower profits, but it could often be volatile.

Kensington expected to come through the current lockdowns largely unscathed, based on past experience.

"These pandemics and lockdowns, the bulk of the risk is taken on to the Government balance sheet and it is the Government giving out money to people to help them survive...but we've seen in the past that every time we go up the alert levels there's been a significant rebound in expenditure."

By rnz.co.nz