Banks grow despite global market uncertainties
New Zealand’s major banks have reported a combined core earnings growth of 25 per cent in the second half of their respective 2011 financial years when compared to the previous six months.
According to the latest edition of the PricewaterhouseCoopers New Zealand Banking Perspectives, an analysis of the financial performance of the five major New Zealand banks – ANZ National, ASB, Bank of New Zealand, Kiwibank and Westpac – their combined core earnings in the second half of calendar year 2011 (2H11) was NZ$2.8 billion, up from NZ$2.3 billion for the first half of their 2011 financial years (1H11).
The earnings lift was driven by increasing net interest income, growth in other operating income, and a modest reduction in operating expenses. Bucking a trend seen since 2010 however, bad debt expenses were up by $24 million.
Overall, this has resulted in profit before tax increasing to $2.4 billion in the second half of the financial year, up from $1.9 billion in 1H11.
PwC Financial Services Partner Sam Shuttleworth said, “The uplift in the banks’ earnings for the second half of their 2011 financial years has come off the back of a solid all round performance across the majority of the key profitability drivers, which reverses the trend seen six months ago, when there was limited movements across these drivers of profitability.”
Net interest income increased by 7 per cent (by $246 million) to $3.6 billion for the second half of the year. The driver of this growth was not the re-emergence of credit growth, with total lending relatively stagnate at $276.3 billion at 2H11, but was principally through an improvement in net interest margin.
According to PwC, the average net interest margin reported by the New Zealand major banks was up by 4 basis points to 2.27 per cent, but still below the major Australian banks which posted an average net interest margin of 2.29 per cent for the same period.
Rain clouds ahead
The report however notes that while there has been a clear silver lining, rain clouds are gathering in the form of tightening credit conditions, an increase in risk premiums for a widening number of eurozone issuers, a simultaneous attempt by governments and households to deleverage, and weakening economic growth prospects.
While the report acknowledges that the major economic question of 2012 will be how deep and prolonged the European recession will be, it concedes that New Zealand banks are unlikely to be directly impacted given they hold relatively little European debt.
Like their Australian counterparts however, New Zealand’s majors may face a number of challenges in the form of elevated wholesale funding costs.
“Indirectly however, this recession may impact the New Zealand major banks’ funding and undermine general business confidence given our exporters will be affected by reduced demand and high exchange rates,” the report stated.
While the banks were able to improve their net interest margins in the second half of 2011, which has driven net income growth, PwC does not foresee this pattern continuing.
“This has been important in order to stimulate the banks’ returns as their lending portfolios have remained flat for another six months at NZ$276.3 billion,” it said.
“With the global economic situation seeming to worsen again, it is hard to see margins continuing to widen unless the banks can pass on the likely increase in funding costs to their borrowers, which will be difficult in this low credit growth environment.”
Notwithstanding the offshore funding issues, PwC’s analysts note that the lack of growth in the lending books mean that the banks have been able to self-fund, with the increase in the retail deposit funding outstripping the increase in lending.
“With no significant growth in lending likely, we expect the New Zealand majors to be able to continue to self-fund in their 2012 financial years as deposit growth continues to outpace lending growth,” the report said.
Despite the clouds hovering over Europe as a result of the debt crisis and other concerns facing the country’s major banks, Shuttleworth believes the New Zealand banking sector is well prepared to weather the storm.
“In addition, the focus by our New Zealand major banks in managing liquidity, combined with these strong results and solid capital base, underlines the strength of the New Zealand banking sector, something which the New Zealand economy will need over
- Categories
- New Zealand
- Tags:
- PricewaterhouseCoopers New Zealand Banking Perspectives, ANZ National, ASB, Bank of New Zealand, Kiwibank, Westpac
- Author:
- AB+F , bkellerman@financialpublications.com.au
- Article Posted:
- February 15, 2012
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