6. Small banks growing lending 12-14 percent

New Zealand's banking minnows loaned more aggressively in the first three months of the year, a period advisory firm KPMG noted as showing a deterioration in asset quality which contributed to smaller sector profit. Paul McBeth from BusinessDesk reports.

The country's licensed lenders posted an 11 percent drop in net profit to $1.24 billion in the three months ended March 31, coming off a record result in December quarter, which KPMG said was due to a reduction in non-interest income, increased costs and higher impaired asset expenses.

The big four of ANZ Bank New Zealand, Bank of New Zealand, ASB Bank-parent Commonwealth Bank of Australia and Westpac New Zealand dominated earnings accounting for 94 percent of the $1.24 billion in the quarter. Of the junior banks, Kiwibank reported profit of $33 million, Heartland Bank $18 million and TSB Bank $14 million.

KPMG's quarterly financial institutions performance survey showed small locally-owned banks have expanded their loan books at a faster pace than the big four Australian-owned lenders and state-owned Kiwibank, with Heartland, SBS Bank, and TSB all logging double-digit expansion in the year through March.

Of the second-tier banks, New Plymouth-based TSB, which is community owned, grew its loan book 14 percent in the year through March 31 to $5.34 billion, followed by 12 percent growth for NZX-listed Heartland to $3.91 billion and SBS also at 12 percent to $3.82 billion. Cooperative Bank, the former Public Service Investment Society, grew its loan book an annual 9 percent to $2.3 billion.

The minnows' quarterly loan expansion ranged from 1.1 percent for SBS to 3 percent for TSB, compared to 0.5 percent to 1.8 percent for the big four plus Kiwibank.

"Loan growth has continued its slower path, with TSB's continued strong growth seemingly at the expense of net interest margin, among the banks analysed in this publication, at 1.8 percent," KPMG head of banking and finance John Kensington said in his report.

The quality of banks' loan books deteriorated in the quarter, with an average 0.17 percent of impaired asset expenses relative to gross loans, up from 0.05 percent both in the December quarter and the March 2017 period.

Kensington said some of the increased provisioning will be because of new accounting rules, but the increase in individually assessed provisions implied other events were also weighing on loan quality.

"Whether this trend represents a turning point in the market cycle or simply variability in results remains to be seen," he said.

Heartland kept the highest net interest margin at 4.5 percent, up 13 basis points in the quarter and 15 for the year, followed by SBS at 2.6 percent, an 8 basis point quarterly decline but still 22 basis points higher than a year earlier, while Cooperative Bank at 2.3 percent was third, up 1 point in the quarter and 5 points in the year.

ANZ, BNZ and Westpac were all at 2.2 percent, while CBA's margin was 2 percent. Kiwibank's was 2.1 percent.