Record bank profits reflect asset growth

By RICHARD BRADDELL

WELLINGTON - Good times, better times. Strong asset growth helped the already buoyant New Zealand banking sector scoop record profits in 1999.

The latest KPMG banking survey shows that registered banks earned total net profits of $1.6 billion, compared with $1.2 billion in 1998.

But while the second half of last year's unexpectedly buoyant economy helped boost 1999 - lending jumped 10.4 per cent to $118 billion and total assets 8 per cent to $150 billion - lending margins continued to shrink and profitability owed much to tight cost control and increased reliance on non-lending income.

On international comparisons, New Zealand lending margins are low.

But even while they are much juicier across the Tasman, the New Zealand banks provided their mostly Australian owners a better return than their parent operations.

The New Zealand return on net assets was 24.5 per cent but in Australia it was a mere 17.3 per cent.

Cost containment resulted in further branch closures and continuing substitution by alternative distribution arrangements, including automatic teller machines, telephone banking and the internet.

While operating income rose 6 per cent, the sector's cost to income ratio which is a measure of efficiency, fell from 62 per cent to 57 per cent, a level far removed from the 78.5 per cent in 1990.

But as KPMG observed, tightening the screws on costs was not without risk.

Referring to previously published research by Auckland University's marketing department, KPMG noted that the quality of customer contact may have deteriorated with many seeming unhappy and frustrated, even while they found bank staff friendly and willing to help.

The research, undertaken last year by Dr Mark Colgate and Bodo Lang, found that 22 per cent of customers had considered switching in the preceding year, but did not do so because of the perceived negative consequences.

While cost-cutting has been a central strategy, banks are also getting their money from non-traditional businesses. Their foray into funds management continued, with funds administered by the big five rising $1.3 billion to $7.6 billion.