Business

Bank profits expected to take a major hit from Covid-19

The country's banks are likely to take a significant hit to their profits from the Covid-19 virus, according to a new report.

Business advisory firm KPMG's latest quarterly Financial Institutions Performance Survey for the final three months of last year showed bank profits had already fallen nearly 7 percent, $1.1 billion, from the previous quarter.

"This drop in profit was a reflection of impacts on the New Zealand economy from then-current domestic and international events, subsequently we have observed the previously unforeseen impact from Covid-19 have far more immediate and potentially prolonged and significant consequences," KPMG head of banking and finance, John Kensington said.

He said the financial market turmoil caused by the pandemic with drop in asset values, cancelled orders and delayed payments were bound to have a major effect, even though it was unclear how big that would be.

"Globally, as governments, central banks and regulators act to contain the spread and support their citizens and economies, the only known is the impact will be significant at many levels," he said.

"What is not known, is how significant this will be in terms of financial and social impact, and indeed the length of time this impact will be felt."

Bank finances were already under pressure before the virus with a squeeze on margins, falling interest rates, and Reserve Bank moves to force the banks to hold more capital to cope with financial crises.

"With such low interest rates, as we move closer to zero, increasing pressure is put on banks' margins. Deposit funding has limits which are required to keep the flow of funds, meaning that banks will only be able to reduce the deposit rates up to a certain point," Kensington said.

"This in turn can affect credit availability in the market. Given the important role of banks to help individuals and firms get through the slowdown, a constraint on banks' ability to lend is not desirable."

The Reserve Bank has delayed the new capital rules by a year, and brought in a variety of measures to ensure banks can get all the money they need to keep lending to businesses and households.

"Covid-19 will continue to test the banks, their customers, the New Zealand Government and regulators for the foreseeable future."

This article was originally published on RNZ and re-published with permission.

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