High profits in the banking sector but challenges ahead – KPMG

Profits remain high in the banking sector, according to the latest KPMG analysis.

Wednesday, September 21, 2022, 6:00 a.m.

by Eric Frykberg

Its quarterly Financial Institutions Performance Survey (FIPS) shows profits in the June quarter were $1.73 billion, slightly below the record set in the March quarter.

The numbers were even more dramatic for income net of interest payments. These rose 7.6%, reflecting the highest net interest margin for each of the big five banks since June 2019.

The KPMG survey indicates that this could be due to more borrowers abandoning their historically low fixed interest rates for their loans.

However, the good days may not last, according to KPMG director of banking John Kensington.

“It’s hard to believe this (strong profitability) is going to continue, given the current economic environment,” he said.

“The sector result appears to be sheltered from the combined impact of inflation, rising interest rates, supply chain issues, regulatory impacts on lending volumes and lower trust.”

In a development that appears to support these concerns, the survey found declining lending volumes at banks.

The figures revealed that despite house prices falling 7.9% since November 2021, new mortgages are down 29% year-on-year.

He suggested this could be due to rising interest rates and the lingering effects of the Consumer Credit Agreements and Finance Act 2003 (CCCFA).

Other possible culprits were tighter loan-to-value restrictions, lower population growth, and strong construction activity.

In the meantime, people were careful to prepare for difficult times.

“Households and businesses have been focused on maintaining their loan repayments despite the cost of living challenges,” Kensington said.

“It remains to be seen whether they will be able to continue like this.”

In another negative development, the survey found that house prices were not falling fast enough to compensate for rising interest rates.

“Some have estimated that the average annual income now required to buy a home is $142,000, up from $135,000 in November 2021,” the KPMG survey wrote.

Breaking down the numbers further, the report found a $227 million increase in banking sector net interest income, which was offset by a $148 million increase in operating expenses. There was a decrease of $37 million in non-interest revenue and an increase of $58 million in tax expense.

The increase in net interest income was mainly due to an expansion of net interest margins across a range of banks.

Net interest margins for the big five banks were the highest since at least June 2019, with increases of around 10 to 30 basis points between March 2022 and June 2022 alone.

The impaired asset charge in the June 2022 quarter was relatively flat from the prior quarter at $52 million.

There were anecdotal signs of pressures on credit quality, but there had yet to be an increase in arrears and bad loans.

However, the report suggests this could be difficult to sustain in the current economic environment.

“Households and businesses are focused on maintaining their loan repayments despite cost of living challenges,” the report said.

“It remains to be seen whether they are able to sustain these repayments throughout the year, and the impact this would have on the banking industry.”

Tags: KPMG

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