Banking sector returns to profit, concerns remain

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New Zealand's banking sector returned to profitability last year, but rural debt sector fears coupled with stagnant growth and the unknown impact of the Christchurch earthquakes continue to weigh heavily on the sector.

KPMG's Financial Institutions Performance Survey 2010 has revealed banks face an uncertain journey to reach safer ground this year, with the as-yet unquantifiable impact of the Christchurch earthquakes the biggest uncertainty.

"All of the banks will suffer some losses, although these have yet to be determined," KPMG's acting head of financial services John Kensington said.

Compounding the uncertainty was the impact of regulatory pressures, particularly the anti-money laundering legislation, financial services regulation and core funding requirements.

Meanwhile Kensington said market participants had expressed surprise at the scale of deleveraging last year, with households reducing debt over a long period.

This meant all of the banks struggled to write new business and meet volume and dollar targets.

However banks would continue to work hard to grow their loan book in the near-term, amid uncertain economic conditions, the softness of the recovery and deleveraging, Kensington said.

At the same time, banks' revenue channels were under pressure. "Net interest margins are again being squeezed, a result of the retail deposit wars of the first half of last year," Kensington said.

The impact was more pronounced on the big five banks, who lost 10 basis
points and saw their margins reduced to 2.09 per cent last year, he said.

But Kensington noted that banks were actively managing their rural assets, rather than forcing a sale in the current market.

Despite high commodity prices, it will still take many years for
the sector to reduce debt to a level deemed satisfactory to its lenders, or the RBNZ.

The Reserve Bank is considering a capital overlay because of concerns at the level of rural debt, which remains at around $47 billion despite many in the sector reducing their exposure.

"All of these elements - deleveraging, high rural debt, stagnant growth, regulation and the Christchurch effect - are still in play and create an environment in which it is challenging for the banks to navigate a path to safer ground," he said.

- NZ HERALD ONLINE