KEY POINTS:
There are clear signs of a slow down in the banking business, says a leading researcher, but it's not bad debts causing the problem.
Massey University head of banking studies David Tripe has released his latest quarterly report analysing the New Zealand banking sector and says the four Australian-owned banks continue to dominate the New Zealand banking market - accounting for 89.69 per cent of the systems assets as at the end of last year.
The two New Zealand-owned banks, Kiwibank and TSB, had a combined market share of 2.86 per cent.
Tripe said there is a "general downward trend in profitability" with five of the six banks showing a fall.
Despite a slumping housing market and an apparent increase in mortgagee home sales, it is not problem loans that causing this profit fall, said Tripe.
"Although some increase is evident for ANZ-National and Westpac, the increases are not especially large. Across all the banks shown the average level of bad and doubtful debt expense has increased from 0.09 per cent to 0.10 per cent of average total assets, which will have only a very marginal impact on profitability."
Westpac showed the highest level of bad and doubtful debt expense, and it also showed the most severe reduction in profitability, but, said Tripe "it would not seem that the level of bad and doubtful debt expense in the December quarter was a major problem."
Bad and doubtful debt expense increased from 0.14 per cent to 0.16 per cent - an increase of just 0.02 per cent of average total assets.
By contrast, Westpac's after tax return on assets fell by 0.19 per cent of average total assets. "Other factors have clearly made a bigger contribution to the reduction in profitability."
Tripe says only ASB had an increase in underlying profitability - across the five banks profitability fell from 1.76 per cent to 1.70 per cent, the same amount as the return on assets had fallen.
In Westpac's case, where the reduction in profitability brought its return on assets below 1 per cent, the underlying profitability fell from 1.69 per cent to 1.56 per cent.
Tripe said Westpac's underlying profitability had been declining for a while, "an issue that is likely to be of concern to its management."
The bank had seen a decrease in net interest income, while at the same time growing assets at a faster rate than the whole banking sector was.
" Moreover, this was the period during which Westpac was increasing its market share in residential mortgage lending. "The question arises as to whether this growth was achieved at the cost of a reduction in margins, and whether this accelerated growth may explain the reduction in net interest income."
Looking at mortgage lending, Tripe said the BNZ's "unbeatable" mortgage lending campaigns, promoted particularly in the final quarters of 2004 and 2006, failed to make a major impact on its market share, despite the wide publicity they achieved and the responses of other lenders.
"An important fixed rate period targeted by the BNZ and others has been two years, and the consequences of the energetic pursuit of fixed rate lending in the final quarter of 2006 can be expected to come to account during the final quarter of 2008, with more borrowers seeking to re-fix their loans."
At the end of May 2008, there was more than $48 billion of fixed rate lending due for interest rate resetting within the next twelve months - up from less than $33 billion a year earlier.
Tripe said this is going to "pose some interesting strategic challenges for the banks, particularly in an environment where mortgage lending growth has been slowing, and we are already seeing some significant reductions in fixed lending rates."
"On the other hand, with a potentially deteriorating credit environment and pressures on the major banks to obtain funding in offshore markets, they could be excused if they decided to adopt a less aggressive stance."
Both borrowers and the banks may be hoping that interest rates will fall further.
New statistics Reserve Bank's newly released statistics on mortgage loan approvals - during November and December 2006, these were averaging almost $1400 million a week . For the same months in 2007, the average had fallen to $1020 million per week.
For May and June 2008, the average had fallen further to $691 million a week.
"There are clear signs of a slowdown!" he said.
- HERALD ONLINE
