KPMG’s analysis of the banking sector’s quarter ending March 2022 shows yet another record quarterly profit, with an 8.08% increase in Net Profit After Tax (NPAT) to $1.74 billion.
The firm’s Financial Institutions Performance Survey (FIPS) report shows that the sector’s result was largely attributable to an increase in net interest income of 2.11% to $2.99 billion, alongside tightly managed operating expenses. The sector saw a 1.25% increase in gross loans and advances to record levels along with an expansion of the net interest margin across the majority of banks to approximately 2.1%.
The sector has also slowed the releasing of loan provisions, with an impairment expense being posted for the first time since September 2020.
“This illustrates a continued focus on cost control from banks as they look to position their businesses for the economic headwinds,” reflects John Kensington, KPMG Head of Banking and Finance.
The operating expenses/operating income ratio decreased to its lowest level in over five years, reflecting growth in operating income outpacing the increase in operating expenses over the longer term.
There was a 1.2% increase in total loan provisioning to $2.47 billion in the March 2022 quarter, consisting of a 1.9% increase in collective provisioning partially offset by a 3.3% increase to individual provisioning.
This was the first increase in the total provisioning level since June 2020 after five consecutive quarters of the sector unwinding the provisions taken at the beginning of the pandemic. Despite the increase in provisioning level, there has been an equal increase in total gross loans and advances, and therefore the coverage ratio has remained flat.
Results at odds with dark clouds on the horizon
The sector’s results might seem immune to the combined impact of inflation, rising interest rates, supply chain issues, intended and unintended regulatory impacts on lending volumes, and a decrease in confidence.
“While it does look like the sector results have been immune, our results are looking at the quarter ending March 2022, so we do expect to see impacts flow into the sector results in our next analysis,” says John. “How deeply the impact is felt is yet to be seen - the sector has been planning for these, and we’ve only just seen the first signs of an impact in the form of provisioning levels increasing.”
“The New Zealand economy traditionally experiences delayed impacts from a crisis – events like the share market crash, the Asian crisis and the GFC have taken two or three years for their impact to show up fully in the economy. Given it’s been little more than two years since Covid-19 first emerged, in the next year or so we would expect to experience the full effect of the pandemic and the resulting inflationary pressures, increased interest rates, supply chain and labour shortage issues. The one very large silver lining is that our banking sector is well capitalised, has been conservatively managed and is well placed to deal with the challenges ahead.”