Homeowners flock to floating mortgage deals

The proportion of fixed rate mortgages plunged last year as homeowners switched to lower floating rates, a survey of the banking sector has found.

The KPMG Financial Services Performance Survey shows the percentage on fixed rates fell from 87 per cent to 71 per cent in 2009.

Head of financial services Godfrey Boyce said as people had rolled off their fixed rates they had moved on to floating rates.

"What we have seen over the year is a run rate of 80 to 90 per cent going to floating [as fixed rate mortgages expire]."

Boyce said the switch had resulted in a surprising improvement across the banks as margins were better on floating mortgages.

Average margins increased by 3 basis points to 2.1 per cent during 2009, a situation which had not occurred for some time.

"We had got used to margins coming down. The trade-off for banks has always been volume growth."

But growth in new loans had fallen during the recession. Boyce said he had expected margins to continue shrinking last year because of the increased cost of borrowing for banks during the recession but they had performed better than expected.

However, loan losses had increased 244 per cent to $2.2 billion, reflecting deteriorating asset quality driven by the recession, suppressed property prices and low business confidence.

Boyce said he expected losses to fall this year and predicted they would be around $500 million for 2010.

Underlying profit across the banks fell 26 per cent to $3.2 billion.

Having ridden out the storm that was much of 2008 and 2009, banks faced a range of constraints including low medium term economic growth.

Banks would have little opportunity to ease tighter credit standards and growth could only be targeted in performing sectors, the report said.

Secondly, the major banks' focus on securing retail deposits was not going to change in the short term, continuing the pressure on the cost of funds for all financial institutions.

A third constraint was the regulatory settings in terms of the Reserve Bank's liquidity policy and asset risk weightings for capital adequacy purposes.

The current environment followed a year in which the aggregate net profit after tax of the registered banks sector fell 90 per cent to only $300 million, representing a return on equity of only 1.5 per cent.

The 2009 results were damaged by the major banks settling long running tax disputes, and major loan losses equal to the aggregate loan losses of the preceding seven years.

Underlying profit fell 26 per cent to $3.2 billion, while a more prudent approach saw loan growth of just 2.7 per cent.

The report says the the global financial crisis stressed New Zealand banks from mid-2008 to the third quarter of 2009, where there was difficulty sourcing offshore funds, particularly at reasonable pricing.

Banks had been forced to seek more funds from the domestic retail market, pushing up the cost of those funds.

That had seen interest rates push up across the curve but particularly between six and 18 months as the banks sought to extend the average term of their deposit book.

The risk management decisions taken by the banks had been reinforced by the Reserve Bank introducing its new liquidity policy.

That policy redefined the structural composition of bank balance sheets, and would encourage holding greater amounts of liquid assets and for a larger portion of the balance sheet to comprise deposits originating from retail sources, or from wholesale sources with maturity terms greater than 12 months, the report said.

At the same time, the banks were experiencing a general reluctance by many customers to take on new debt, but KPMG expected there would be a modest net rise in bank lending in 2010.

A particular concern was the rural sector, given its importance to New Zealand and the number of non-performing loans in the sector.

Banks were making a concerted effort to ensure a systemic issue was not entrenched by one or more banks taking a hard line on their exposures and forcing farm sales which would have an across-the-board impact on farm values. Rather, the banks were looking to work through the issues with farmers and there had been considerable refinance activity.

As a result, relatively few farms were sold during the past six to nine months. Despite that, farm values had fallen probably by more than 10 per cent, and potentially significantly more in distressed areas.

STATE OF BANKS
* Profit down 26 per cent to $3.2 billion last year
* Loan losses up 244 per cent to $2.2 billion
* Margins up slightly as borrowers switch to floating loans
* Concerns about lending in the rural sector

- ADDITIONAL REPORTING: NZPA