Profits across New Zealand's banking sector rose 35 per cent in the last quarter of 2020 as banks reduced the amount of money set aside for loans that could have gone bad as a result of economic fallout from Covid-19 and cut costs.
Banks made $1.36 billion in the three months to December 31, up from $1.007b in the September quarter, KPMG's quarterly Financial Institutions Performance report shows.
John Kensington, head of banking and finance at KPMG, said the banking sector had recovered strongly from the initial fears of the economic impact from Covid-19 and, despite a drop in net profits during 2020 compared with the prior year, the second half of 2020 had been in line with 2019 profits.
"Much of the improvement stems from lower impairment charges (or, in some cases, reversals) in the quarter, reflecting how the current credit quality of lenders' books is significantly better than where they were predicted to be."
Kensington said government support packages had had a huge impact, but the financial resilience of most New Zealanders had been much stronger than anticipated this time last year.
Net interest income at the banks rose 5.7 per cent during the quarter to $2.69b while operating costs fell 5.7 per cent led by ANZ, which cut $103.6 million from its operating expenses during the quarter.
Kensington said the rise in working from home was likely to be a driver of lower costs for the banks.
Total lending over the quarter rose 1.78 per cent to $447b led by Kiwibank, which had a nearly 4 per cent rise in lending over the quarter.
Year on year Kiwibank also led the sector with a 10.7 per cent rise. SBS saw the biggest fall in lending, which declined 2.23 per cent year on year.
October, November and December each marked new highs for monthly mortgage lending in 2020, with the overall trend tracking up after a drop in April with $9.65b in loans written in December alone.
That was 48 per cent higher than December 2019 and 80 per cent higher than December 2018.
Kensington said the housing market was a double-edged sword.
"No doubt its consistent climb has helped support confidence, but when the regulator, banks and the Government all look at tools to slow it further I think we can all agree it is in undesirable territory at present."
Kensington said while the Reserve Bank had given the banks some breathing space from implementing upcoming regulation this time last year, it was now back on the agenda with the recently announced RNBZ Enforcement Department, which will work alongside RBNZ's Supervision team.
Two recent examples of major banks having capital and liquidity breaches highlight that there are still significant challenges being faced by the banking sector in how they report that information, he said.
"The constant judgment the sector undergoes only reiterates the importance of taking a customer-centric approach when designing new products, reviewing legacy ones and of having effective and compliant processes for this," Kensington said.