KPMG’s analysis of the banking sector’s quarter ending June 2022 shows impressive profits, with the quarter’s results – $1.73 billion – being just shy of the record set in March 2022.

The firm’s Financial Institutions Performance Survey (FIPS) reports a 7.6% increase in net interest income – reflecting the highest the net interest margin has been for each of the big five banks since June 2019.

These positive results still don’t fully reflect the impact of the economic and regulatory changes which are having an impact on the wider economy.

“It is hard to believe this will continue, given the current economic environment,” says John Kensington, KPMG Head of Banking and Finance.

“The sector result seems immune from the combined impact of inflation, rising interest rates, supply chain issues, regulatory impacts on lending volumes and a decrease in confidence.”

Operating expenses have returned to more normal levels after the operating expenses / operating income ratio reached a five-year record low last quarter. This is potentially driven by the same tight labour market that other businesses are facing. 

Cost of living and borrowing challenges

Households continue to come under pressure from the rising cost of living and increasing home loan rates.

While the Government’s cost of living payment, 25 per cent cut in fuel excise duty and half-price public transport will be benefiting some households, the actual impact of the measures remains uncertain as they could be seen to further fuel inflation.

A historically low unemployment rate of 3.3% and a tight labour market leading to an increase in median weekly earnings by 8.8% year on year to $1,189 may have provided some households with relief from cost-of-living pressures.

Despite house prices falling by 7.9% since November 2021, new mortgage lending was down 29% year-on-year, not helped by rising interest rates, continued effects of the Credit Contracts and Consumer Finance Act 2003 (CCCFA), tighter loan to value restrictions, weaker population growth and strong building activity.

“Households and businesses have been focused on maintaining their loan repayments despite facing cost of living challenges. It remains to be seen whether they will be able to keep this up,” says John. 

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