KPMG’s Financial Institutions Performance Survey report shows profit for quarter ended March 2021, up 20.69% to $1,642.9M from the $1,361.2M profit in December 2020. For the banks, this is a record profit for a quarter.

The main drivers of profit this quarter were an increase in lending (of 1.86% combined with a small increase in margin), an increase non-interest income (up 64.8%) and the reversal of previously incurred loan provisions. While this quarter’s strong profit is a positive sign for the economy, there are still multiple indicators of volatility in the market and global uncertainty continues.

“Looking forward, I expect some of the trends we’ve seen in this quarter’s report will continue. Non-interest income volatility and the reversal of provisioning are likely to carry on, and hopefully so too will the stronger economic signs,” says John Kensington, KPMG’s Head of Banking and Finance. “The only certainty remains, however, that nothing is certain.”

Home working and home lending

A range of factors including housing demand outstripping supply, record low interest rates creating affordability, and the continuation of remote working for many New Zealanders has, together with the ‘fear of missing out’, likely contributed to the increase in mortgage lending. The result was a record-high of $10 billion in new mortgages in March 2021 alone.

At the same time the quarter saw a $20.2 million, or 1.44%, decrease in expenses compared to last quarter.

The growth in lending of 1.86% across the sector may seem low, but John explains it has a number of underlying components to it. “While there has been strong mortgage lending growth, this has been offset by reduced corporate, commercial, and consumer lending,” says John. “In addition, some banks have seen significantly greater lending growth than others, and the1.86% is an average.”

Ongoing challenges

Covid-19 is still impacting New Zealand’s economy, if indirectly. Skill shortages, a lack of customers for airlines and tourism businesses and disruption to supply chains all have an effect on the economy and the banking sector.

Despite these ongoing concerns, banks have started releasing provisions over the last two quarters as New Zealand’s economy has proven more resilient than forecasts made in March 2020 predicted. The report explores the gap between the forecasts and reality over the past year and whether the volatility and uncertainty calls for a new approach to modelling.

Regulatory demands

Regulation is another major theme, with regulatory requirements coming at banks from the RBNZ, FMA, Treasury, MBIE, the Commerce Commission and the Financial Action Task Force. A recent report has exposed “major gaps in New Zealand’s framework” for anti-money laundering and counter financing of terrorism, so we are likely to see more investment from banks in the skills and capabilities of their workforces to demonstrate robust processes.

The KPMG IMPACT team also discusses the upcoming climate reporting requirements under the Financial Sector (Climate-Related Disclosures and Other Matters) Amendment Bill. The report outlines that banks have a critical role to play in lifting the non-financial reporting capability of New Zealand and need to act now.

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