KPMG’s Financial Institutions Performance Survey (FIPS) review of 2020 has revealed the largest net profit after tax (NPAT) decrease captured by the survey in the past ten years.
The results highlight the effect of Covid-19 on the banking sector, with NPAT down $1.58 billion (27.57%) from 2019 to $4.14 billion. The key drivers being the increase of the impaired asset expense by $1.08 billion (275.20%), and an increase in operating expenses (excluding amortisation) of $486.24 million (9.04%).
Net interest margin (NIM) fell 14 basis points (bps) from 2.10% to 1.96%, with net interest income seeing a slight dip of 0.46% ($50.26 million) to $10.83 billion. Conversely, interest-earning assets saw a proportionally larger increase of 6.70% ($35.82 billion), with all but three of the major banks surveyed achieving an increase of interest-earning assets in 2020.
Head of Banking and Finance at KPMG, John Kensington says our new normal has changed the way we work and do business. Increasingly we are seeing trends that were a necessity during level four lockdown becoming commonplace in the workplace, with many businesses adopting work-from-home friendly business models.
“As an essential service, the banks quickly adapted and beefed up their technology and the related security capabilities such as the video conferencing, secure remote signing capabilities along with actions such as waiving of the payWave fees for retailers, which together with increased personnel and regulatory expenses have all contributed to the increase in operational costs we’ve seen across the sector,” says John.
Additionally, for the fourth consecutive year, the banking sector achieved new record low funding costs as interest rates continue to drop. Funding costs (calculated as interest expense over average interest-bearing liabilities) has decreased by 61 bps to just 1.98%.
While Covid-19 appears to have had a more immediate effect on bank’s NPAT than the likes of the global financial crisis (GFC), where we saw decreases of 1.2% (2007), 0.1% (2008) and 98.8% (2009), the New Zealand financial system has to date proved to be strong and the banks resilient.
John says despite profits being down, New Zealand banks remain resilient. The banks were fast to act and worked collaboratively with each other, the government and the Reserve Bank of New Zealand (RBNZ) to support the economy.
“The difference between now and the GFC is that there has been enormous government support and banks are now part of the solution – working together with the government to help customers get through the pandemic.
“No one knew exactly what the impact of Covid-19 would be with many forecasting exercises subsequently proven wrong,” says John.
After each lockdown, New Zealanders quickly bounced back into as normal a way of life as possible. We saw significant increases in spending for most sectors, and in some cases, figures were up when compared to the previous year.
“It will be interesting to see whether this level of spending can be sustained. While the high house prices and low interest rates are contributing to confidence amongst homeowners, there are a lot of people for whom the ending of government assistance could have had a huge impact,” says John.
While the sector plays a pivotal role in aiding economic recovery and fostering change in how we do business in New Zealand, it is important banks continue preparing for other changes to come.
The RBNZ has pushed out the deadline for capital increases to July 2022 but other aspects of the 2019 reforms remain due for implementation by 1 July 2021. Climate-related reporting will be another area of change for banks. Other emerging threats include cybercrime. The need to exhibit diversity and inclusion and the continued pressure on conduct and culture aspects should also be on the radar.
“It may now be a good time to bring forward change which may have been in the pipeline for a five to ten-year period, as we individually, as a sector, and a nation look to reset,” says John.
Connect with us
- Find office locations kpmg.findOfficeLocations
- Social media @ KPMG kpmg.socialMedia