Bank profits cut nearly in half by Covid-19 economic crisis

Tuesday, 25 August 2020

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Bank profits have taken a huge hit from the economic disruption caused by the Covid-19 lockdown and ongoing restrictions on activity.

Reserve Bank figures show the combined profit after tax of the registered banks was $821 million in the three months to the end of June compared to $1.5 billion in the same period last year.

Despite the drop, banking expert Claire Matthews from Massey University said the banks remained strong.

“Arguably this is more the level of profit we would like to see, but they can cope with this substantial hit they are taking, and still be supportive of borrowers and businesses,” she said.

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The central bank’s figures show the biggest drop in income for banks was from borrowers either paying lower interest on their loans, or not making interest payments on their loans.

But that drop was offset by a sharp drop in banks’ funding costs, included having to pay $240m less in interest to depositors compared to the previous three-month period.

“Interest rates are low. That may be great for borrowers, but it’s not good for depositors,” Matthews said.

Many depositors were older people who relied on interest income to help fund their retirement spending, she said.

Despite an increase in bank savings, bank depositors were paid just $1.25b in the three months to the end of June, compared to just under $1.5b in the three months before that, and $1.63b in the three months before that.

Bank interest income fell to $4.68b in the three months to the end of June, compared to $5.23b at the three months to the end of March.

That appeared to be a result both of lower funding costs, but also some homeowners having been allowed to defer making repayments after losses of income caused by the economic slump.

Banks got $143m less in interest from their home loan customers, and $235m less from their business customers in the three months to the end of June compared to the previous three months.

Despite the drop in interest income, Matthews said banks had suffered only a relatively modest drop in their “net interest income”, which is the gap between the interest they pay to depositors and funders, and the interest they earn from lending to businesses and households.

Bank net interest dropped to $2.64b in the three months to the end of June from $2.78b in the previous three-month period.

The banks also accounted for large increases in bad debts.

In the three months to the end of June, the banks collectively accounted for $505m of impaired loans.

Matthews expected that to worsen in the coming months.

The Reserve Bank data showed bank personnel costs spiking to $867m, up just over $100m on the same period last year.

New Zealand Bankers’ Association chief executive Roger Beaumont said banks had taken on staff earlier in the year to cope with rising compliance costs.

But, he said: “The support the banks are offering vulnerable customers and the work that’s happening with customers in that situation is quite time and people-intensive.”

Though the big banks have been closing branches, many staff have been deployed to call centres to cope with the huge demand from financially stressed households and businesses.

After a deal with the Reserve Bank, the big banks have allowed tens of thousands of homeowners and businesses to make reduced repayments on their debts, with many temporarily ceasing to make payments at all.

There are many households who are not on mortgage “holidays', but who are behind in their mortgage payments.