KPMG’s Financial Institutions Performance Survey (FIPS), Review of 2018 has revealed yet another strong year for New Zealand banks with net profit after tax (NPAT) up 11.21% from $5.19 billion to $5.77 billion, a new record for the sector.

The record profit was mainly driven by improved net interest margin (up 4 bps to 2.12%) and strong asset growth (up 5.07%), assisted by the continued strong local economy.

The four main banks (ANZ, BNZ, CBA and Westpac) contributed a total of $482 million of the increase in NPAT. Kiwibank, the fifth major bank, presented a 116.98% increase in NPAT, however this is largely attributed to significant impairment expenses on IT projects in the year prior.

Conduct or Culture, Capital and Confidence were top of mind for sector participants in the wake of the Australian Royal Commission. While the Reserve Bank of New Zealand (RBNZ) and Financial Markets Authority’s (FMA) Conduct and Culture report  in November found that the extent of issues locally did not mirror those found in Australia, it set a new base of expectations for the sector, putting good customer outcomes at the forefront of all activity.

“The difficulty around the concept of ‘everything should be for the customers benefit’ is not the concept itself, because most people would agree with that premise, but is more around where do you look for a blue print, as no industry currently has that model. On top of this is the issue of how you then measure it in a constantly changing world, and a world that is more socially aware and transparent through the use of social media,” says John Kensington, KPMG’s Head of Banking and Finance.

Kate Stewart, Financial Risk Management expert at KPMG, shares further insights in this year’s review, highlighting the heightened need for financial service providers to exceed conduct expectations in order to succeed in the new environment.

The RBNZ consultation on capital caught the banking sector by surprise. Though the sector had anticipated an increase in capital required, the additional amount proposed surpassed expectations.

“In addition to the usual challenges of innovation, increased regulation, and competition, the additional imposts from the Conduct and Culture review responses and proposed capital consultations have cast a dark shadow over the banking horizon.  If there is one thing markets don’t like, it is uncertainty,” says John Kensington, KPMG’s Head of Banking and Finance.

This year's review also includes commentary and insights from KPMG Tax Partner Bruce Bernacchi on the coalition Government's Tax Working Group and capital gains tax, pending the February 2019 release of their final recommendations.

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