Mortgage lending, too, drops
The banking sector has delivered an overall decrease in their net profit for the March quarter – its first quarter-on-quarter fall in profits since mid-2021 – as some major banks prepared for more of their loans to go bad, according to KPMG’s quarterly banking survey.
Bank profits fell 13% to $1.54 billion in the March quarter, from $1.77bn in the last three months of last year, which according to John Kensington, KPMG head of banking, was a reversal to the general trend of rising profits in recent years.
The profit decline was largely driven by major banks increasing their provision for bad debts by 192.9% to $320m. As a percentage of operating expense, impaired asset expense sits at 20.55% – the largest impaired asset expense recorded by banks outside of the pandemic since 2011, when Kiwis faced the Christchurch earthquakes and fallout from the global financial crisis.
“These provision increases are an indication that the banking sector is experiencing deteriorating economic conditions, including lingering high inflation, increased cost of living, and a tight labour market,” Kensington said.
“These factors are driving banks to increase provisioning in response to the increased likelihood of customers not being able to meet their repayments, and we would expect this trend to continue throughout 2023.”
Bad loans on the rise
Keith McLaughlin, managing director, at Centrix Group, said credit arrears surged in the first four months of 2023, as Kiwi households struggled to meet their repayment obligations due to overall financial challenges.
McLaughlin noted an upswing in personal loan, BNPL product, auto loans, and credit card delinquencies, while utilities remained relatively stable.
In the case for mortgages, he said long-term delinquencies, too, remained relatively stable since April 2022, but “there is a creep beginning for mortgage delinquencies when we look at the year-on-year growth.” For instance, 1-to-29-day delinquencies have increased by 33%, while 90-plus delinquencies were up 19%.
Kensington said with a large number of borrowers to refix their mortgages at higher interest rates, it can potentially lead to an increase in arrears in the future.
“Looking forward, it will be interesting to see whether banks continue to provide for future expected credit losses, and the degree to which these losses eventuate,” he said.
Mortgage lending plunges
Also contributing to the dip in bank profits is a big drop in mortgage lending.
In the March quarter, new mortgage lending was down 28.3% on the previous quarter and down 24.5% on the March 2022 quarter.
“Mortgage lending was down across all categories; however, the degree of the fall varied,” Kensington said. “New lending to first-home buyers decreased by 9.2% from the December 2022 quarter to $2.7bn, while lending to other owner-occupiers decreased by 32.6% to $11.3bn and lending to investors decreased by 32.7% to $3.1bn in the same period.”
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