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Quake cools deposit war: KPMG

The flight of money out of finance companies and insurance money from the first Canterbury earthquake has helped the deposit interest rate war abate, at least for now, says accounting firm KPMG.

Tuesday, 3 May 2011

by Jenny Ruth

Nevertheless, near zero lending growth, largely as a result of retail and business customers focus on paying down debt, is putting pressure on banks' net interest margins, although the trend from fixed-rate mortgages to higher-margin floating rate mortgages is helping to ameliorate this trend, KPMG says in its latest survey of financial institutions.

The banks are also actively repricing business and corporate loans but the full impact has yet to be felt. "We would expect some benefit to net interest margins," the accounting firm says.

"Banks are well-positioned with funding and ready to do business. However, that business remains hard to find," KPMG says.

Anecdotally, competition for retail deposits has eased. "Certainly, reduced lending opportunities ... lack of demand and the strong cash position of all the major banks has taken some of the heat out of the competition for funds," it says.

The registered banks' net interest rate margin fell from 2.21% in 2009 to 2.12% in 2010 with the big five banks seeing their margin drop from 2.19% to 2.09%.

The government-owned Kiwibank was the biggest loser, its net interest margin dropping from 1.88% to 1.19% while Westpac's fell 15 basis points to 2.22% and National Australia Bank-owned Bank of New Zealand's fell 19 points to 2.07%.

By contrast, ANZ National Bank's margin rose nine basis points to 2.43% while Commonwealth Bank of Australia-owned ASB Bank's rose four basis points to 1.68%.

Kiwibank's near total reliance on domestic funding "perhaps illustrates the extent of damange of the deposit wars on the big five banks," KPMG says.

Kiwibank's funding costs jumped from 3.99% for the year ended June 2010 to 4.26% in the six months ended December 2010.

"On the lending side, differences were noticeable. Kiwibank had the lowest return at 5.03%, almost half a percentage point below BNZ at 5.58% which was in turn 30 basis points shy of ANZ at 5.9%."

ASB's return on assets was noticeably better at 6.47%, but its cost of funds was also much higher than the other four major banks at 5.31%. Westpac's cost of funds was 5.01%.

"The campaign by the Commerce Commission to crack down on transactional, dishonour, mortgage break fees and other associated charges in the banking sector clearly impacted the banks in 2010," KPMG says.

Fees and commission income across the five major banks fell by more than $200 million, or 13%, to $1.5 billion. Reduced lending was also partly responsible for this fall.

But while total lending growth is just above zero, "the largest growth in real dollar terms is still occurring in residential mortgages," the accounting firm says.

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