KEY POINTS:
Higher funding costs, competition for residential mortgages and a substantial switchover to fixed rates have affected profitability at the big New Zealand banks, a study finds.
The latest report from Massey University's Centre for Banking Studies shows the major banks all continued to perform well in the December 2007 quarter, but the weighted average return on assets decreased slightly from 1.14 per cent to 1.08 per cent.
A similar trend emerged for underlying profitability, with a small increase for ASB but a decrease for the other banks included in the survey, ANZ-National, BNZ, TSB, Kiwibank and Westpac.
Excluding Kiwibank, underlying profitability as a whole fell from 1.76 per cent to 1.70 per cent. In Westpac's case, where the reduction in profitability brought on the return on assets below 1 per cent, underlying profitability fell from 1.69 per cent to 1.56 per cent.
Author David Tripe wrote that Westpac had shown a significant decline in its interest spread, and this seemed to have impacted severely on its net interest income.
It has also come at a time when the banks were increasing their assets, with Westpac achieving a growth rate faster than for the system as a whole. It was also increasing its market share in residential mortgage lending.
"In such circumstances, it is reasonable to expect that any reduction in margin would persist, because of the prevalence of fixed rate mortgage lending, which is at lower margins, and which has continued to increase since December 2005."
The proportion of mortgage loans at fixed rates in December 2005 was 79.9 per cent, but this had increased to 86.6 per cent by December last year.
"Beyond that, New Zealand banks' need to obtain funding from international markets means they have been affected by higher finding costs, caused by the so-called sub-prime crisis."
Tripe wrote that the attention on residential mortgage lending was justified because it was such an important part of the banks' overall business.
As at December 31 last year, 45 per cent of total bank assets were secured by residential mortgages, a figure high by international standards. Among Australian banks, the figure was 30 per cent.
The report also found that while there was some increase in bad and doubtful debt for ANZ-National and Westpac, the increases were not especially large.
