Recommended NZ | Guide to Money | Gimme: Competitions - Giveaways

Bank Profits Slide 22% As Bad Debts Quadruple

Fuseworks Media
Fuseworks Media
Bank Profits Slide 22% As Bad Debts Quadruple

New Zealand's five major banks (Westpac, ASB, ANZ National, BNZ and Kiwibank) are weathering the economic turmoil with solid half-year results, however a quadrupling of bad debts has forced down profits by almost a quarter over 18 months.

According to the PricewaterhouseCoopers 'New Zealand Banking Perspectives', an analysis of the five majors' past three half-year earnings, the banks' most recent combined half-year statutory profits dropped to $1.2 billion for 1H09, a reduction of 1.8 percent.

However, compared to the same period last year, there has been a 22 percent overall decline in statutory profits. This equates to a combined loss of more than $360 million since the reported results for the first half of 2008. PwC Financial Services Partner Sam Shuttleworth: "Given that New Zealand has been in a recession for more than a year, the most recent results show our banks have performed credibly with a modest decline in combined statutory earnings compared to the previous six months," he says. "But the sustained impact of five quarters of negative economic growth is taking its toll."

"Bad debt expenses have increased by $623 million since this time last year, largely due to the collapse of corporate borrowers plus the provisioning for the current economic cycle. As a result of the deterioration in lending portfolios, future volatility in bank earnings cannot be ruled out."

"Weighing up the results there are indications that the dramatic profit slide may have started to slow - however it's difficult to predict whether this trend will continue into the second half of 2009."

Profits lag behind Australia

According to the Australian Banking Perspectives publication, banks across the Tasman have shown a more modest decline, with a reduction of 1.3 percent in underlying earnings in 1H09, and a 5.6 percent decrease since the same period last year.

Shuttleworth: "In terms of performance, New Zealand's banks are faring better than those in the UK and America. However, our analyses show that the five New Zealand majors are increasingly lagging behind those in Australia".

"This difference between New Zealand and Australian banks is due to lower growth in net interest income, as well as a higher percentage of asset write-offs and bad debt expense in New Zealand. However, this could have been much worse, considering that New Zealand has been in recession a year longer than Australia."

Net interest and other income

Shuttleworth: "The results show that despite the recession, the banking market is still active and banking remains a busy business. The five majors have taken action to maintain their profitability, as well as maintain their capital adequacy and liquidity, and a continued focus on cost containment is also showing in their reported results."

The five majors increased their net interest income by 10.5 percent compared to the second half of FY08. "The increase is due to underlying growth in assets, upwards re-pricing of risk margins on loans and partly due to the spike in break fees as customers sought to renegotiate their mortgages," he says. "However, it's important to note that over time this increase will be offset by increased funding costs associated with these renegotiated mortgages which are not yet recognised on the banks' financial statements."

Other income increased also by 4.8% when compared to 2H08. "While there are a number of reasons for this increase, the recent high market volatility has created favourable conditions for banks due to client demands for foreign exchange and interest rate products to manage financial risks."

All articles and comments on have been submitted by our community of users. Please notify us if you believe an item on this site breaches our community guidelines.