Banks net interest income falls - PwC

New Zealand’s five major banks (ANZ, ASB, BNZ, Kiwibank and Westpac) showed strong profits and lending growth in the first quarter of 2015, according to a PriceWaterhouseCooper (PwC) analysis.

They posted a $94 million net profit before tax – which was an increase of 5.9% to $1.69 billion in earnings.

However, the increase was offset by a decrease in net interest income of $3 million (0.1%) and an increase in impairment losses on loans of $11 million (12.4%).

PwC Partner and Banking & Capital Markets Leader Sam Shuttleworth said that the decrease in net interest income was lost within the headlines of continued record profits by the banks.

While there was an increase of $6 billion (or 1.9%) to $327.3 billion in total gross loans over the first quarter of 2015, interest income decreased by $40 million to $5.3 billion over the same period.

Further, interest income as compared to average interest earning assets decreased from 5.95% in the fourth quarter of 2014 to 5.78% in the first quarter of 2015.

Shuttleworth said the decrease in net interest income was a reflection of the current, very competitive lending market.

“Banks are keen to attract new customers or retain existing customers through low interest rates which have eaten into their lending margins.”

PwC’s analysis showed there was total lending growth of 1.90% for the first quarter of 2015. This was up from 1.47% in the previous quarter of 1.47%.

The growth left total lending at $327.3 billion at the end of the quarter, as compared to the $321.2 billion in total lending three months earlier.

Of this lending, mortgage lending growth was at 1.72%, which was up from the previous quarter’s mortgage lending growth rate of 1.26%.

This left the first quarter’s mortgage lending total at $193.7 billion, as compared to $190.5 billion in the fourth quarter of 2014.

Shuttleworth said that seasonality, with more housing sales expected during the summer months, had to be taken into account when looking at the first quarter mortgage lending growth.

However, he also noted that the growth was higher than any quarter during 2014.

This reflected the continued heated housing market, particularly in Auckland, and the current low interest rates offered by the banks.

PwC’s analysis also found the percentage of mortgages with an LVR in excess of 80% have continued to reduce.

In the first quarter of 2015, such mortgages represented 14% of total mortgage lending, as compared to 15% of total mortgage lending in the fourth quarter of 2014.

Shuttleworth said this reduction showed the ongoing influence LVR restrictions have had on New Zealand’s mortgage market.

Overall, PwC found the mix of mortgage funding continued to increase in the medium to long-term of fixed interest rates in the first quarter of 2015.

Approximately 46% of mortgage lending was fixed for longer than one year, as compared to 43% in the fourth quarter of 2014.

This was largely due to the banks offering customers low mortgage interest rates in the medium to long terms in order to drive volume growth.

Meanwhile, the banks’ capital levels continued to remain strong.

The average total capital ratio was hovering at 12.5%, which was well ahead of minimum requirements.

Shuttleworth said it will be interesting to see what impact the Reserve Bank’s new asset class treatment for residential property investors might have on capital ratios from 1 October onwards.

Time will tell what the full impact of the Reserve Bank’s various initiatives aimed at the housing market will be, he added.

“But at least the Reserve Bank won’t be accused of not taking active steps to lessen the risk of financial instability from a sharp correction in house prices.”