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Surge in lending growth for Kiwi banks

Kiwi banks recorded their biggest growth in lending since 2009 in the second half of their 2012 financial years.

Friday, February 1st 2013, 9:00AM

The result may come as a red flag for Reserve Bank Governor Graeme Wheeler, who announced yesterday he would be keeping a close eye on household credit growth.

But bank profits decreased 11% compared to the previous six months, due to increasing costs and strong competition in the lending market.

Customers haggling for better deals were cutting banks’ margins, PwC Partner Sam Shuttleworth said.

““Borrowing rates are dropping as homeowners and businesses aggressively renegotiate interest rates, even in the middle of fixed rate periods. In this competitive environment, the banks are playing ball as they focus on the longer game of increasing the value of their lending books by locking more customers into fixed rate mortgages and an easing of pricing to corporate customers. “

Shuttleworth said banks would need to avoid reducing their interest margins too much, if the banking system was to retain its reputation as a safe one.

New Zealand’s five major banks reported core earnings of $2.453 million in the second half of their 2012 financial years, down from $2.712 million for the previous six months.

Households are locking in fixed-rate lending – 22% of loans are now fixed for more than a year, compared to 15% in March.

Bad debt costs seem to have plateaued at $279 million, compared with $277 million in the first half of the financial year, and have improved 24% year-on-year.

Shuttleworth said that the flourishing Auckland and Christchurch property markets made the outlook positive for banks.

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Westpac predicting rates to rise faster than forecast

In its recently released quarterly economic overview report, Stephens writes that Westpac’s prediction is for 90-day interest rates to rise much faster than either the Reserve Bank or the market expects.

It picks the first move in interest rates to happen in June 2013, when it says the OCR will still be at 2.50%.

By 2014, Westpac expects 90-day rates to be 4%. By comparison, the RBNZ tips them to have barely moved at 2.75% and the swaps market implied pricing puts them even lower, at just over 2.50%.
By 2015, Westpac expects rates to be over 5%.

Stephens’ report said that the Christchurch rebuild would make it hard for New Zealand to avoid substantial inflation.

“The inflation figures suggest that central co-ordination of small to moderate repairs – the bulk of the activity to date – has been effective in limiting construction cost inflation. This is unlikely to remain the case as major repairs and rebuilds take over as the main form of activity.”

He pointed to the fact that new housing in the Canterbury region has already risen roughly 10% over the past year.

Stephens said he expected home loan rates to follow the same trajectory as 90-day rates. They might stay on hold for another year or so but then would have to rise.

“Floating rates may not rise quite as rapidly as 90-day rates because at the moment banks have to pay a higher margin to procure funds from overseas. That pressure might come off.”
But he said it was unrealistic to expect the current historic lows to continue past 2013.

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