Are banks profiting from higher interest rates?

Inflation, falling house prices, rising interest rates:

Stacy Squires / Stuff

Inflation, falling house prices, rising interest rates: “Despite these seemingly difficult circumstances, the banking sector has continued to post impressive profits,” says KMPG.

Banks appear “immune” to household and corporate inflation battles, posting record first-half profits as they extract more money from borrowers.

KPMG has released its latest survey on the performance of financial institutions.

He said the sector appeared immune to the combined impact of inflation, rising interest rates, supply chain issues, regulatory impacts on lending volumes and a decline in business and consumer confidence.

Released on Wednesday, the report said the banking sector recorded its second-highest profit on record in the June quarter of this year, down slightly from the previous quarter.

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In the first six months of this year, banks increased their net interest margins, said John Kensington, head of banking and finance at KPMG.

The net interest margin is the difference between the rate at which banks borrow money and the rate at which they lend it.

Jon Duffy, managing director of Consumer, said: ‘Banks are not charities, so they will always try to make a profit.

But, he said: “The question is growing; what is a reasonable profit and when does profit become excessive?

“I think there will be many Kiwis who will see their mortgage payments go up, KiwiSaver balances go down and their daily living costs skyrocket who will rightly feel concerned that banks can increase their profits even as much in the broader economic struggle,” Duffy said.

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“Unfortunately, consumers don’t have a lot of choice in New Zealand because all the banks seem to follow the same pattern,” Duffy said.

The eight most popular retail banks’ combined profits for the June 2022 quarter were $1.73 billion, down slightly from the record $1.74 billion recorded in the March 2022 quarter, Kensington said. .

This was partly because banks were able to narrow the gap between the cost of their funds and the rate at which they could lend.

“The Big Five banks’ net interest margins were each the highest since at least June 2019, with increases of around 10 to 30 basis points between March 2022 and June 2022 alone,” Kensington said.

In the June quarter, TSB, Co-Operative Bank, Kiwibank and Heartland Bank were the most successful in increasing their margins over the past three months.

Kensington said banks have been talking about a rate hike for some time and may have positioned themselves for them, blocking their funding.

It was easier for banks to increase margins in a rising rate environment than a falling one, he said.

Exactly why competitive forces were not forcing down the price that households and businesses pay for banking was unclear.

Jon Duffy, Managing Director of Consumer NZ, says: “The question is growing;  what is a reasonable profit and when does profit become excessive?

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Jon Duffy, Managing Director of Consumer NZ, says: “The question is growing; what is a reasonable profit and when does profit become excessive?

While people could switch banks and KiwiSaver provider, Kensington said most households and businesses are not actively switching banks.

Duffy said the Commerce Commission has completed market research into the supermarket sector and is currently completing market research into the residential building materials market.

Perhaps he should look into the banking sector next, he said.

Kensington said immunity to economic blows suffered by households and businesses could fade for banks.

Inflation would start showing up in their costs, including in their payrolls, he said.

“If I had to bet, I’d say next quarter they’ll be a bit down from these record highs,” he said.

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