Lending up but profits down for major banks

A PWC report released this morning on New Zealand's five major banks will bring cold comfort to those opponents of the profits being taken across the Tasman by the Australian-owned branches.

The banks in the report include the New Zealand Government-owned Kiwibank, along with the Australian-owned ANZ, ASB, BNZ and Westpac.

According to the PwC New Zealand Banking Perspectives, the banks' combined before-tax profits in the second six months of their 2012 financial years were $2.17 billion, down from the $2.44 billion reported in the first six months of their financial years.

The $261 million fall in operating profit was driven by a reduction in other operating income (down $156 million), increasing operating expenses (up $102 million), while net interest income and bad debt expenses both stayed flat.

PwC banking sector leader Sam Shuttleworth said that when examining the collective annual results, operating profits for the 2012 financial years were up 6%, or $253 million, when compared with the previous corresponding period.

''The five major banks' income is down and costs are up as increasing regulatory pressures and strong competition in the lending market drive down earnings and mask what is pleasing market growth.''

Borrowing rates were dropping as homeowners and businesses aggressively renegotiated interest rates, even in the middle of fixed rate periods, he said.

In that competitive environment, the banks were ''playing ball'' as they focused on the longer game of increasing the value of their lending books by locking more customers into fixed-rate mortgages and an easing of pricing to corporate customers, Mr Shuttleworth said.

A $5.2 billion increase in the value of the lending books in the second half could not be interpreted as a bad result for the banks. It was a great indicator of improved confidence and stability in the economy.

''In fact, it's the first time the corporate sector has recorded two consecutive periods of lending growth since 2009.''

As the banks competed to attract borrowers in a low growth market, they needed to resist the temptation of reducing their interest margins too far if the New Zealand banking system wanted to retain its global reputation as a safe banking environment, Mr Shuttleworth said.

With the Reserve Bank responding to the global regulatory environment, banks had faced additional regulatory-driven changes. What set the current environment apart was the ''sheer volume'' of significant new regulation being introduced. The regulations required banks to address the way they did business and it commanded a large part of their annual budgets.

Meeting the cost of increased regulation is one of the drivers forcing up operating expenses 16% since the first half of 2010.

''Ultimately, this cost is borne by the banks' borrowers and shareholders though higher interest rates and a reduction in dividend yields to shareholders,'' he said.

The five banks
• Largest growth in their lending books since 2009
• Before tax profits fell 11% in second half of 2012
• Competitive household and corporate lending markets
• Bad debt expense flattens

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