Banks in New Zealand face a series of constraints as they seek to move ahead following the global financial crisis, KPMG's annual financial institutions performance survey says.
The banking and finance sector was faced in 2009 with the most difficult market conditions for many years, and for some probably the most difficult challenges ever faced, said the report published today.
Having ridden out the storm that was much of 2008 and 2009, the banks could look forward but there were constraints and disciplines to operating in the current environment.
The first constraint was a low growth environment for the medium term. Banks would have little opportunity to ease credit standards and growth could only be targeted in the performing sectors of the economy, the report said.
Secondly, the major banks' focus on securing retail deposits was not going to change in the short term, continuing the pressure on cost of funds for all financial institutions.
A third constraint was the regulatory settings in terms of the Reserve Bank's liquidity policy and asset risk weightings for capital adequacy purposes, the report said.
The current environment followed a year in which the aggregate net profit after tax of the registered banks sector fell 90 percent to only $300 million, representing a return on equity of only 1.5 percent.
The 2009 results were damaged by the major banks settling long running tax disputes, and major loan losses equal to the aggregate loan losses of the preceding seven years.
Loan losses for the registered banks rose 244 percent to $2.2 billion reflecting deteriorating asset quality, driven by recessionary economic conditions, suppressed property prices and low business confidence.
Underlying profit fell 26 percent to $3.2b, while low loan growth of 2.7 percent resulted from prudent and risk adverse lending behaviour.
Net interest margins stabilised 3 basis points higher at 2.1 percent in 2009, reflecting a recovery in the lending and mortgage interest margin since 2008 largely offset by intensified competition and interest rate increases in the funding books.
Essentially the global financial crisis stressed New Zealand banks from mid-2008 to the third quarter of 2009, where there was difficulty sourcing offshore funds particularly at reasonable pricing, the report said.
The reaction had been to go to the domestic retail market to obtain a greater proportion of funding for balance sheets.
The result had been the major banks competing on price to secure retail deposits. That had seen interest rates push up across the curve but particularly between six and 18 months as the banks sought to extend the average term of their deposit book.
Considerable upward pressure was being put on the cost of funds, with the banks forced to recover increased funding costs from lending customers, the report said.
"This is evident in the progressive increase in mortgage margins and repricing generally."
The risk management decisions taken by the banks had been reinforced by the Reserve Bank introducing its new liquidity policy.
That policy redefined the structural composition of bank balance sheets, and would encourage holding greater amounts of liquid assets and for a larger portion of the balance sheet to comprise deposits originating from retail sources, or from wholesale sources with maturity terms greater than 12 months, the report said.
At the same time, the banks were experiencing a general reluctance on the part of many customers to take on new debt, but KPMG said it expected there would be a modest net rise in registered bank lending in 2010.
A particular concern was the rural sector, given its importance to New Zealand and the number of non-performing loans in the sector, the report said.
Banks were making a concerted effort to ensure a systemic issue was not entrenched by one or more banks taking a hard line on their exposures and forcing farm sales which would have an across the board impact on farm values.
Rather, the banks were looking to work through the issues with farmers and there had been considerable refinance activity.
As a result relatively few farms were sold during the past six to nine months. Despite that, farm values had fallen probably by more than 10 percent, and potentially significantly more in distressed areas.
NZPA