Banks prepare for rising bad debts

The major banks are clearly preparing for a rise in bad debts, even as their actual losses to date remain exceptionally low.

In its latest Financial Institutions Performance Survey, accounting firm KPMG noted that the impaired asset expense of the major banks jumped 191.9% in the March quarter from the December quarter to $320.2 million.

“Driving this change are significant increases to both individual and collective provisions,” KPMG said.

This is the fifth consecutive quarter in which collecting provisioning has increased, reaching $2.68 billion in the March quarter across all the banks, up 10.7% from $2.43 billion in the December quarter.

Individual provisions rose 7.7% to $284.1 million from $263.8 million in the December quarter.

“These provision increases are an indication that the banking sector is expecting deteriorating economic conditions, including lingering high inflation, increased cost of living and a tight labour market to adversely impact customers,” KPMG said.

“These factors are driving banks to increase provisioning in response to the increased likelihood of customers not being able to meeting their repayments and we would expect this trend to continue throughout 2023,” it said.

The biggest increase in the quarter in impaired asset expense was Westpac's 41 basis point rise to 0.52% of average gross loans, followed by Bank of New Zealand's 26bp increase to 0.25%, while Heartland Bank's 0.55% ratio, up 13bp in the March quarter, was the largest expense in percentage terms.

That isn't surprising, given the specialist nature of Heartland's lending, which is concentrated on reverse mortgages and motor vehicle financing,      

However, ASB Bank's impaired asset expese was down 14bp to just 0.04% of gross loans, the lowest of the banks, and Kiwibank's was down 2bp to 0.12%.

KPMG said, excluding the pandemic, impaired asset expense across the major banks is now 20.55% of total operating expenses, its highest level since 2011 “when we faced the Christchurch earthquakes and the fallout from the GFC.”

It quoted former Westpac treasurer Jim Reardon as expecting that further indicators of financial stress will start to show as more and more people refix their mortgages at higher interest rates.

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