Banking sector holds uncertainty on path to recovery

Westpac's Hub is due to open next month.

While the banks dig deep to help their customers, the storm clouds are gathering above the banking sector according to a KPMG report.

John Kensington, KPMG's acting head of financial services, says banks face an uncertain journey to reach safer ground this year as they face deleveraging, rural sector debt, general economic uncertainty and the unknown impact of the two Christchurch earthquakes.

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

"Deleveraging was the big story of 2010," says Kensington. "Households were reducing debt over a long period of time and the deleveraging is multifaceted and occurring at almost every level of the loan book.

"As a result, all of the banks struggled to write new business and meet volume and dollar targets. Uncertain economic conditions, the softness of the recovery, and deleveraging means banks will continue to work hard to grow their loan book in the near-term.

"Net interest margins are again being squeezed, a result of the retail deposit wars of the first half of last year. 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."

However, Kensington says the biggest uncertainty on the path to recovery for the banking sector, is the as-yet unquantifiable impact of the Christchurch earthquakes.

"All of the banks will suffer some losses, although these have yet to be determined," he says.

"The bigger impact will be the residual effects on the regional and national economies, further delaying recovery and compounding banks' weak lending growth in the coming year."

- NZ Herald Staff