Record profits: Banks made $7 billion last year - a billion-dollar increase on 2021

New Zealand’s banks made a record $7.18 billion in 2022 - a net profit after tax that was a billion dollars higher than the year before - but are expected to face tougher times ahead, according to KPMG’s Financial Institutions Performance Survey.

The figure will add fuel to calls for a banking inquiry into the sector’s high profits which come as consumers face the fastest-rising mortgage rates in history.

John Kensington, head of banking and finance at KPMG, said he didn’t have a view on the need for an inquiry but said it was important to understand why profits had risen so much.

“It’s really arisen due to two things. The first is they have grown their book by 5.5 per cent over the year. So they have got 5.5 per cent more loans on their books and they are a very big [industry].”

On top of that the banks grew their net interest margin from 1.97 per cent to 2.1 per cent, boosting net interest income by $1.53b.

“When those two things happen to an already large balance sheet it is by default going to put money down into the profit line.”

But he said the next two years were expected to be tougher for the sector.

“It is a cyclical thing. I would say over the next couple of years you might see some different outcomes as perhaps some of this inflation starts to bite and you have a Reserve Bank governor who is saying, all his actions are saying, I’m pulling money out of the economy.”

He expected to see flatter earnings and higher impairment growth.

Kensington said the collapse of US bank Silicon Valley Bank was also a reminder of how quickly things can deteriorate when there was a run on a bank’s deposits.

“If you look at a bank’s balance sheet it might have 15 to 20 per cent of its assets in liquid assets and it might have access to a bit more - but it just shows you how it’s a very fine line between things looking very rosy and things looking much more dire.

“And that is a salient reminder. Absolutely we don’t want that as a country - we have a very wide range of banks that offer a wide range of products to a wide range of industries - some of the smaller ones operate in particular niches and by and large New Zealanders do get the ability to have access to a wide range of banking services. If one of our banks were to get into that sort of difficulty it would put some real pressure on the system, I would imagine.”

He said New Zealand typically took some time to be hit by an economic downturn, pointing to the 1987 share market crash, the Asian Crisis and the Global Financial Crisis.

“Our immediate two years after that have never been too bad. It’s been years three and four or even four and five - we are probably seeing that again.”

Kensington said bank executives were well aware of their financial strength and knew the next few years were a time for them to offer support to customers.

“They are well aware they are well placed and will need to support people through this next period to validate that social licence to operate.”