New Zealanders could be left with the bill as banks face increasing regulation, a new report into the industry suggests.
KPMG has released its latest Financial Institutions Performance Survey quarterly update.
It shows the banking sector bounced back at the end of last year. It reported an 10.73 per cent increase in profit, to $1.24 billion in the December quarter, after a drop in profit the previous quarter.
For the three months to December, six of the nine bank survey participants reported an increase in profit levels. ANZ and Westpac led the increase for the banking sector, with $115 million of the total $119.87m increase in profit.
READ MORE: Bank profits drop for first time in seven years
Kiwibank and The Co-operative Bank recorded a 25 per cent ($7m) and 21.3 per cent ($587,000) profit increase, respectively.
BNZ had the biggest profit drop, which it said was due to a decline in net interest income of $3m, a $12m increase in operating expenses and a $6m increase in impaired asset expense.
In the December quarter, the banking sector ended with an additional $4.2b (0.94 per cent) in total assets, off the back of $5.62b (1.48 per cent) in loan book growth.
TSB Bank and SBS Bank saw the greatest percentage growth in their loan books, with increases of 6.7 per cent ($280.58m) and 6.06 per cent ($186.29m), respectively.
John Kensington, KPMG’s head of banking and finance, said banks had been able to revise loans that had previously been written off and revaluation of derivatives had delivered gains.
The FIPS report noted the housing market was starting to slow, with a noticeable decrease in sales volume, although it said it was yet to be seen whether this cooling would stick if demand-supply imbalances were not resolved. It said residential lending would be expected to make up the core of banks’ interest income for some time to come.
“We’re seeing the beginning of the impact of new LVR restrictions and the major banks excluding overseas income from affordability calculations,” Kensington said.
Banks were more cautious than they had been, he said. “They’re saying they are near the top of the cycle and some of the loans at the top have higher risk.”
But he said some of the projects that had stalled because of a lack of bank funding could have been marginal deals that they were better off to avoid. “Yes, there has been some genuinely more careful lending by banks and application of policies but a little bit of that has been talked up.”
He said it was likely that coming quarters would deliver static profits. The slowing in the property market, and an increasing interest rate bill on the money banks borrowed, meant it would be surprising to see profits lift again next quarter.
Kensington said tighter regulations were a concern for the banking sector.
It was possible they could lead to costs being passed on to consumers, he said, such as where banks were required to bring back business functions they had outsourced offshore. The Reserve Bank has an exposure draft out on its Outsourcing Policy. “There are bits of regulation that won’t help the banks easily be more efficient or save costs.”
The report notes the Reserve Bank has called for submissions on “housing, household debt and policy” from the banks, and anti-money laundering laws are also adding costs, among other regulatory changes.