Mortgage lending grows

PwC’s latest analysis of the five major New Zealand banks (ANZ, ASB, BNZ, Kiwibank and Westpac) performance shows that net profit went up to $1,696 million over the quarter to 30 September 2015.

This was an increase of $11 million from the second quarter of 2015.

However, net interest margins continued to decrease and lending growth slowed down.

Net interest income went up by $20 million (0.9%), but impairment losses on loans increased by $29 million (39.7%), as compared to the second quarter of 2015.

Once the impact of a one-off reclassification by the banks was normalised, other operating income was up by $28 million (3.7%) while operating expenses increased by $8 million (0.7%).

In the analysis, PwC partner Sam Shuttleworth said that, underneath the headline growth, there were some indications the sustained period of earnings might be difficult to maintain.

Intensification of the current competitive lending environment has made for the record low interest rates being offered by the banks in a bid to win market share.

This has strained lending margins as more customers have moved to lower margin fixed rate mortgages.

Shuttleworth said that, with the pressure on net interest margins, net interest income growth was primarily driven by a fall in interest expense.

This decreased by $108 million (3.3%) to $3.2 billion due to favourable funding conditions.

But interest income decreased by $88 million (1.6%) to $5.3 billion in the third quarter - despite 1.7% growth in gross lending to $341 billion.

This meant the impact of lower asset margins on the banks’ results was greater than the increase in lending volumes.

Lending growth was also slowing, Shuttleworth’s analysis found.

It was lower than the previous two quarters, up just 1.73% in the third quarter, leaving total lending at $340.5 billion.

Slower corporate lending growth was the driver behind the slowdown.

However, mortgage lending growth went against the grain – despite all the talk of Auckland’s housing market cooling down.

It was up 1.94% (to $201.2 billion) from the second quarter growth of 1.85%, which made it higher than corporate lending growth for the first time since 2014.

Shuttleworth said the growth has been driven by the record low short-term fixed interest rates.

“With the new lending restrictions in place from 1 November 2015, it will be interesting to see how the next quarter’s growth pans out.”

Meanwhile, the percentage of mortgages with an LVR in excess of 80% has continued to fall.

It was at 12.9% of total mortgage lending in the third quarter, as compared to 13.8% of total mortgage lending in the second quarter.

The analysis also found there was a stable level of customers on floating rates.

Shuttleworth said mortgage holders might be holding out for further interest rate cuts before fixing, because of speculation about further OCR cuts.

However, it was possible that the US Federal Reserve’s rate hike last week could increase the banks’ funding costs which could, in turn, lead to higher lending interest rates.