Banks' profits have climbed to record highs following a year of Covid-19, but the road ahead could be bumpy.
A range of factors led to increased mortgage lending, the survey says. Photo: 123RF
KPMG's Financial Institutions Performance Survey report shows banks' profit for the quarter ending March was up 21 percent to $1.64 billion, from $1.36b in the December quarter.
The main drivers were an increase in lending of nearly 1.9 percent, combined with a small increase in margin, a 65 percent increase in non-interest income and the reversal of $202.6 million previously incurred loan provisions, with fewer defaults and bad debts.
The quarter also included a record $10b in new mortgages during the month of March.
A range of factors, including housing demand outstripping supply, record low interest rates creating affordability, and the continuation of remote working for many New Zealanders, together with the 'fear of missing out', likely contributed to the increase in mortgage lending, the report says.
"Looking forward, I expect some of the trends we've seen in this quarter's report will continue," KPMG head of banking and finance John Kensington said.
"Non-interest income volatility and the reversal of provisioning are likely to carry on, and hopefully so too will the stronger economic signs."
Despite the strong quarter, there were still challenges facing the sector and the wider economy as a result of the pandemic, including skill shortages, a lack of customers for airlines and tourism businesses and disruption to supply chains.
"The only certainty remains, however, that nothing is certain," Kensington said.
"While there has been strong mortgage lending growth, this has been offset by reduced corporate, commercial, and consumer lending," he said, adding that some banks had seen significantly greater lending growth than others, with average growth of just under 1.9 percent.
At the same time the quarter saw a $20.2 million, or a 1.5 percent drop in expenses compared to the December quarter.
Other challenges include increased regulatory demands from the Reserve Bank, Financial Markets Authority, Treasury, Ministry of Business, Innovation and Employment, the Commerce Commission and the Financial Action Task Force.
"A recent report has exposed "major gaps in New Zealand's framework" for anti-money laundering and counter financing of terrorism, so we are likely to see more investment from banks in the skills and capabilities of their workforces to demonstrate robust processes," the report says.
Climate change-related issues would also put more pressure on banks as they had a critical role to play in lifting the non-financial reporting capability of the customers, as set out in The Financial Sector, Climate-related Disclosure and Other Matters Amendment Bill, which received cross-party support in its first reading in April.
As a result, banks were already requesting more climate-related information from their customers as part of their pre-lending and refinancing applications.
Despite the stepped-up efforts, the report said New Zealand organisations were lagging behind international counterparts, with the majority of large organisations providing limited or no information on what climate change might mean to them.
"The new mandated changes will require compliance ... banks will need to shift from passive to active engagement with these issues," it says.
Another change for the banks to grapple with was customer vulnerability.
It said the economic impacts of the pandemic had highlighted the financial insecurity of many people, forcing banks to do a better job of listening and supporting their customers through stressful periods.