28 Apr 2010

Higher loan costs not going away in a hurry

8:16 pm on 28 April 2010

Accountancy firm KPMG says the legacy of last year's bad loans is expected to linger for the next few years, and that's likely to mean small businesses and the commercial sector will pay more for access to funding.

The company's annual survey of the performance of financial institutions shows banks' underlying profit fell by 26% to $3.2 billion last year.

That drop reflected the ballooning cost of bad loans, which more than doubled to $2.2 billion.

KPMG head of financial services Godfrey Boyce says the sector experienced a watershed year as credit quality problems grew, more expensive funding put pressure on margins and lending activity dropped off.

Some of those pressures have eased, Mr Boyce says, though risks remain.

"There's a lot of uncertainty, particularly in the small business sector," he says, "and the commercial sector and banks are going to reflect that risk in terms of the pricing they put on lending into those sectors."

Mr Boyce expects profits in the financial sector to improve this year but warns that large losses on bad loans will remain for the next few years.