FIPs Quarterly June 2020

As anticipated, reporting for the quarter ending June 2020 confirms that New Zealand’s banking sector profits have continued to drop. The period of reporting includes the nationwide Alert Level 4 and Level 3 lockdowns in place between April and June.

KPMG’s Financial Institutions Performance Survey (FIPS) report, shows profits for the quarter dropped 13.25% ($118.7 million) to $776.9 million, following a 20.41% decline ($229.6 million) in the previous quarter. Economic support packages from the Government have provided a welcome buffer for many New Zealanders. However, as the end of the wage subsidies draws closer and we enter the deepest national recession in history, concerns that we are yet to see the full economic impact of COVID-19 are mounting.

Though recent forecasts suggest the outcome may be better than initially thought, banks’ provisioning has continued to increase to mitigate the pending risk.

“In June 2014, the banks’ provisioning was sitting at $1.3 Billion, and over the next five and a half years to December 2019 it increased to $1.6 Billion. So, over that five and a half years it went up by $0.3 Billion largely due to a rising sector book. In contrast, the six month period between December 2019 and June 2020 saw provisioning increase from $1.6 Billion to $2.5 Billion, increasing roughly three times the amount by $0.9 Billion,” says John Kensington, KPMG’s Head of Banking and Finance.

Lending remained flat for the quarter, dropping just 0.28%, a strong result considering that almost the whole month of April was spent in Level 4 lockdown with business ground to a halt.

“It is worth remembering that June was a bumper month, and lending in July 2020 was actually ahead of July 2019, and the highest July since the Reserve Bank dashboard began recording this data,” says John.

The Reserve Bank of New Zealand (RBNZ) removed the loan-to-value ratio (LVR) restrictions in April with the intention of encouraging first home buyers. This has been successful so far with the highest July lending figures since 2013, driven by a 30% increase in both first time buyers and investors. Economists are predicting that mortgage rates will fall below 2% next year.

The nature of this economic crisis has redefined our definition of ‘vulnerable customers’. Banks are having to give more consideration to how they identify and manage at-risk individuals at a time of financial hardship for many.

“Some of the people impacted by this crisis are not the ones you would have expected. Yes, those on the lower socio-economic end of the scale will be impacted but there are many jobs and businesses that you would have thought were safe which now aren’t. To look at two simple examples, pilots, as international travel has all but stopped and inner-city carparking buildings as people adopt to working from home,” says John.

As the initial crisis phase comes to an end, regulators will need to redirect their attention to conduct. The RBNZ continues to make it very clear that it expects the banks to play a major part in how New Zealand deals with the current economic crisis, making sure vulnerable customers are protected.