Banks reaped a record $5.77 billion after tax in 2018, driven by an improved net interest margin and asset growth. Despite the profit growth, KPMG warns banks will need to take action as the RBNZ capital proposals loom large.
John Kensington, head of banking and finance, KPMG New Zealand, says the capital rules pose the “biggest threat” to bank profitability, and predicts they could spell bad news for Kiwi borrowers.
He told TMM banks will either reduce their loan books or inject extra cash to meet the Reserve Bank’s demands. The latter option is likely to force a hike in mortgage rates and cut in term deposits, Kensington says: “Under both scenarios, there’s not the same level of freedom in terms of dishing out credit.”
The comments echo those made by investment bank UBS. The Swiss bank warned New Zealand mortgage rates could be forced up by $2 billion to cope with the new rules.
Kensington adds: “The banks will make less of a return on their equity. The two simple ways to address this are to pay people who deposit with you less, and make home loan borrowers pay more.”
Kensington says banks may have to increase profits from current levels to meet the demands of the new regime -- if it comes into effect as planned. He adds: “If parent companies of the Australian banks decide to maintain the level of return, they will have to make more profit. Off the back of a record profit year, it is quite challenging times.”
He believes the capital proposals, coupled with pressure from the Royal Commission and New Zealand regulators, will mean tighter credit conditions for borrowers in the years to come: “If you’re an investor with a second or third property, and want an interest-only loan, you may be told to pay that mortgage down. Some of the freedom of choice of products may be taken out.”
Mortgage rates are currently near record low levels, but Kensington predicts global pressure on interest rates could see this come to an end. He said: “In the last year there has been a 13 basis point reduction in funding costs for the banks, which has meant they’ve been able to cut rates by 9-10 bps. It’s important to understand that the reason rates have been coming down, to sub 4-% levels, is they’ve been able to fund them more cheaply and have passed nearly all of that on to the customer. In a world sense, if rates stop coming down, the ability for mortgages coming down starts to end.”