KPMG reported that Kiwi banks posted record profits totalling NZ$1.64 billion in the first three months of this year but warned lenders against boosting earnings through the early release of bad loan provisions.
The consultant’s Financial Institutions Performance Survey report showed that profits for the March quarter were up 21 percent on the NZ$1.36 billion posted for the prior quarter.
The result was boosted by NZ$10 billion in new mortgages in March alone, driven by massive rises in house prices which have meant house buyers borrowed larger amounts.
Costs for the March quarter were down more than NZ$20 billion on the previous three months, partly because of branch closures and the cutting of office space.
“For the banks, this is a record profit for a quarter,” said John Kensington, head of banking and finance at KPMG.
Aside from increase mortgage lending, higher margins, and higher non-interest income, a key profit driver was the reversal of loan provisions booked at the height of the pandemic when there were fears that bad loans would escalate. As Covid hit, the banks ramped up their loan loss provisions. But with the strong economic bounce back they started releasing some of them, boosting profits.
Over the December 2020 and March 2021 quarters, New Zealand financial institutions made a combined net release of NZ$202.6 million impairment expenses, KPMG’s report said.
“It's a positive sign for the economy, but there's still a lot of volatility and uncertainty to contend with,” added Kensington.
“Covid-19 has not yet fully tested the New Zealand economy - evidence shows that risks often don't surface until after a crisis. While early Government action is giving us a positive outlook, businesses' ability to weather the storm is still partly dependent on the vaccine rollout, future lockdowns, and the recovery of international travel.
"It would seem from the pace of the release, that most financial institutions' senior management might be taking a balanced approach with the releases as there are still some uncertainties concerning the future economic outlook.
Loan loss models not built for Covid times
KPMG also noted the loan loss models were not built to deal with a high level of volatility and uncertainty and pointed out that economic indicators had moved from one extreme to the other over a year.
”These models have never been trained to read across sudden contraction and expansion of the economy as most financial instructions' historical data used for the modelling exercise comes from a benign period. In addition, these predictive models were not designed to consider the effects of active government intervention."
"As such, management has become more cautious when analysing the outputs of the forward-looking provision models as it may in some cases not align with their expectation."