22 Apr 2024

Profit squeeze on the cards for New Zealand's big four banks - rating agency

6:38 am on 22 April 2024
ASB, Westpac, BNZ and ANZ bank signs.

The market dominance of the four big four Australian-owned banks in New Zealand make them resilient to a downturn, but they will feel the pressures nonetheless says Fitch senior associate Tim Roche. Photo: RNZ / 123rf

A slowing economy, lower margins, rising costs and bad debts are set to squeeze the profits of the country's big four banks, according to rating agency Fitch Ratings.

A new report from the company said New Zealand's economy would be subdued through the year and that would be felt in the performance of ASB, ANZ, BNZ, and Westpac.

They are all rated A+ by Fitch, which is the same as their Australian parent companies.

Sydney-based senior associate Tim Roche said the banks' relatively straightforward business mix and their market dominance made them resilient to a downturn, but they would feel the pressures nonetheless.

"We are expecting earnings to weaken this year ... we expect the net interest margins to contract as a result of some of the funding costs increasing for the banks, some of the cheap central bank funding maturing and being replaced with market based funding, also competition on the asset side."

"The impairments will be a function of the weaker economic environment so we are expecting there to be some weakness for some borrowers, not all, but on the whole we expect most borrowers to be well positioned to deal with the downturn and for asset weakness for the banks to be manageable."

Roche said unemployment was expected to rise modestly, but the high level of employment would help borrowers to maintain payments, and in turn would help sustain banks' earnings.

He said New Zealand bank profits were not excessive compared with overseas banks, but said Fitch preferred to measure operating profits to the risk weighting of the assets they loaned against.

"The returns are good but when we look at it compared to similarly-rated peers globally, they're not at the top of that peer group, but they do stand well from a profitability standpoint."

Roche said the development of open banking, which allows consumers to switch easily between banks and finance companies, would offer challenges to the big banks although experience overseas was mixed about how significant it might be.

KPMG's most recent banking sector report showed collective sector profits at record levels, but growth levelling out.

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