16 Feb 2017

Banks to find it tougher to increase profits - survey

10:01 am on 16 February 2017

Banks are going to find it tougher to increase their profits as their margins are squeezed and interest rates rise, according to a new survey.

The Reserve Bank of New Zealand

The Reserve Bank is urging banks to carry out their business in New Zealand, rather than under the jurisdiction of another regulator. Photo: RNZ / Alexander Robertson

KPMG's Financial Institutions Performance Survey said the banking sector's net profit fell more than 6 percent last year to $4.84 billion, from a record high of $5.17bn in 2015.

It said banks have been preparing customers for a period of adjustment with the cost of borrowing expected to keep rising as loans and deposits had fallen seriously out of balance.

KPMG's partner and head of banking and finance John Kensington said the return on banking assets and equity has slipped to unsustainable levels.

"Going forward, executives have commented that a big emphasis will be placed on improving and monitoring these levels of returns rather than just focussing on loan book growth," he said, adding that margins were being squeezed by competitive pressures, higher costs of funds and global volatility affecting non-interest income.

He said banks were also finding it difficult to cut their costs by outsourcing services overseas.

"At present the single biggest area of concern in the regulatory space is in relation to the RBNZ's revised outsourcing policy," Mr Kensington said.

The Reserve Bank wants banks to carry out their business, including back room operations, totally in New Zealand, rather than under the jurisdiction of another regulator.

"Looking to the future, the banking sector is facing a time of increased challenges, volatility and uncertainty," he said.

Among those challenges was US President Donald Trump's trade polices, Britain's plans to leave the European Union and New Zealand's upcoming federal election.

"Nothing makes markets more expensive than a degree of uncertainty as to what might happen," he said.

In addition, he said the sector was having to adjust to increasing consumer demand for digital services, as well as the need to provide a high level of cyber security.

"Investment in technology and digital capabilities will remain critical in 2017 and beyond. We've seen most of the banks innovate in this area, to an extent, but to truly counteract the threat of market disruptors and improve customer experience this needs to continue," he said.

"Expect to see more partnerships between banks and existing technology companies in this Fintech space."

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