KEY POINTS:
Years of fast-rising profits as the booming housing market fed rapid growth in assets may be drawing to a close, the first-half results from three of the four big banks over recent weeks have indicated.
While two of the three reported higher profits, growth has not been as spectacular as in recent years and in commentary accompanying the numbers the banks indicate they see potential for tougher times ahead.
That has coincided with a warning from the Reserve Bank that difficulties banks may face in maintaining profits during leaner times would likely be passed on to borrowers in the form of higher interest rates.
ANZ National, the biggest bank, increased net profit by 8 per cent, well down on the 14 per cent it achieved during the March 2006 half.
Westpac's bottom line shrank by 3 per cent over the year against a 4 per cent increase a year ago. Only Bank of New Zealand managed to accelerate growth in underlying net profit to 11.2 per cent from 8 per cent a year ago.
The numbers appear consistent with accounting firm KPMG's view that last year - when banks' overall net profits were up by 11.1 per cent and assets by 15 per cent - was probably about as good as they could expect for some time.
Much of the banks' recent growth has come as people poured ever increasing amounts of cash into housing.
Registered banks' mortgage lending rose from around $70 billion five years ago to about $135 billion and the loans now account for about 55 per cent of their total assets.
While annual growth in overall housing debt has slowed from its peak of 17.4 per cent in 2004, it was still running at a robust 14.2 per cent in the year to March.
However there is some perception that the Reserve Bank's two latest interest rate rises, and movements on wholesale money markets, have now taken fixed-term mortgage rates high enough to effect the cooling the central bank is looking for.
ANZ National chief executive Graham Hodges recently confirmed the bank saw "a potentially more challenging market for the next 18 months" due to a likely slowdown in core growth areas including consumer credit and home loans.
Even the BNZ, perhaps the most aggressive bank during the fight for market share which broke out during the housing boom, is now showing signs of caution.
New chief executive Cameron Clyne last week said the bank was happy now to build its housing and consumer credit at a slower pace than the wider market in order to maintain credit quality ahead of an inevitable turn in the credit cycle.
"Market share is vanity, profit is sanity," he said, echoing a comment from his boss, National Australia Bank chief executive John Stewart, last week in reference to his expectations the credit cycle in Australia was also turning.
While Clyne said banks were in "a really good part of the credit cycle" that wouldn't last forever.
"We don't know when this one's going to turn ... the longer the cycle goes on the closer we get."
And according to Reserve Bank deputy governor Grant Spencer, speaking at last week's release of the RBNZ's twice-yearly financial stability report, the longer the housing cycle lasts, the bigger the correction will be when it ends. But at the same time as mortgage lending has been rising, competition for market share has seen the per dollar profitability, or margins, on those loans narrow.
ANZ National, Westpac and BNZ all reported lower net margins for the March half.
The Reserve Bank, previously concerned that lower margins had dulled the effect of its interest rate increases on the housing market, now has concerns that they may have future implications for borrowers, and banks' balance sheets.
That's a concern raised by accounting firm KPMG in its recent survey of the sector. "Should there be significant slowdown in asset growth or a deterioration in credit quality, the registered banks will be challenged in terms of pricing and margin management."
While low margins may be sustainable during rapid growth and benign credit conditions, as lower profitability is offset by higher volumes and fewer defaults, should that growth ease and defaults rise, banks may be forced to raise them again at exactly the time when borrowers are under pressure.
"Unsustainable margins would exacerbate the housing cycle and the ultimate impact of that cycle on banks' own balance sheets," said the RBNZ.
