Financial Institutions Performance Survey FIPS Review of 2017 1 3.68% 7.35% escalation in growth in NPAT operating expenses 8 2 3.94% 3 1.17% rise in net decrease in provisions interest income 9 bps 4 4.68% decline in net increase in interest margins gross lending 7 5 7.30% 6 40 bps drop in gross drop in average impaired assets funding costs Contents 2 The Survey 4 A KPMG view from the editor KPMG’s Financial Services team provides 6 Industry overview 16 Timeline of events focused and practical audit, tax and advisory 20 Some of the significant management changes in the sector services to the insurance, retail banking, 22 Sector performance 30 Analysis of annual results corporate and investment banking, and 38 Major banks – Quarterly analysis 42 Getting practical with blockchain investment management sectors. 46 Conduct, robo-advice and good client outcomes 50 Revolutionising the banking eco-system 54 Getting past compliance crisis management Our professionals have an in-depth 60 Customer friction – reducing through emerging trends in Fintech innovation understanding of the key issues 64 RBNZ: Modernising disclosures with Bank Financial Strength Dashboard facing financial institutions. 66 FMA: Show us better outcomes for your customers 68 NZBA: Code of Banking Practice breaks new ground Our team is led by senior partners with a 70 Massey: Banking industry forecasts 74 Ownership and credit ratings wealth of client experience and relationships 75 Descriptions of the credit rating grades 76 Definitions with many of the market players, regulators 77 KPMG’s Financial Services Team 78 Contact us and leading industry bodies. 2 | KPMG | FIPS 2017 FIPS 2017 | KPMG | 3 The Survey The KPMG Financial TABLE 1: ENTITY MOVEMENTS Institutions Performance Who’s out Who’s in Survey (FIPS) report of 2017 Deutsche Bank AG, Banks: 241 — Nil represents the 31st year that New Zealand Group KPMG has provided in-depth insights into New Zealand’s banking sector. In this edition, we will be presenting industry As with all previous FIPS Surveys, We wish to thank the survey the information used in compiling participants for their valued commentary and analysis our analysis is extracted from contributions in the following two on the performance of the publicly available annual reports ways: for the additional information New Zealand registered and disclosure statements for each provided and for the time made organisation, with the exception of available to meet and discuss the banks, together with a range certain information provided by the industry issues with us. of topical articles from other survey participants. Massey University continues to be a partner and key contributor to the key stakeholders such as In late 2017, we published and compilation of this publication by industry experts, regulators launched our Non-bank Financial assisting with the data collection and Institutions Performance Survey (Non- and our own business leaders. drafting the banks’ profit forecasting bank FIPS) separately, as opposed to section of this survey. We thank the combined Banks and Non-Banks them for their continued assistance launch in prior years. Accordingly, and contribution. the Non-bank FIPS document is The survey covers registered banks no longer appended to the rear of External contributors continue to with balance dates between 1 October this publication. The Non-bank FIPS play a vital role in our publication by 2016 and 30 September 2017. As providing insight on key issues and document can be downloaded from a result, registered banks with the developments that we might not KPMG’s website and located at the balance date of 31 December will otherwise have. We would like to following link: https://home.kpmg.com/ have their 31 December 2016 financial acknowledge the contributors from nz/en/home/insights/2017/12/fips-non- results included in this year’s survey the RBNZ, the Financial Markets as their most recent results. The banks banks--review-of-2017.html. Authority (FMA), and New Zealand with 31 December balance dates are Following the announcement of Bankers’ Association (NZBA) for their Bank of China, China Construction its withdrawal from New Zealand, exceptional contributions toward the Bank, Citibank, Industrial and Deutsche Bank has since surrendered compilation of this publication. Commercial Bank of China, JPMorgan its banking license to the Reserve We have supplemented their external Chase Bank, Kookmin Bank, Rabobank Bank of New Zealand (Reserve Bank thought leadership commentary with and The Hongkong and Shanghai or RBNZ) in August of 2016. Hence, some of KPMG’s own business line Banking Corporation. Deutsche Bank is no longer included in thought leadership. We trust you will this publication. find this survey’s content of interest. © 2018 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2018 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4 | KPMG | FIPS 2017 FIPS 2017 | KPMG | 5 A KPMG view from the editor Following on from a trying and The key takeaways from the 2017 — It is clear that banks are still trying — The implementation of NZ — The constant threat of disruption year highlighted by the survey are to understand the ‘customer IFRS 9 Financial Instruments has and the growth of digitisation in volatile 2016, industry profits as follows: of tomorrow’, they are trying to begun, with banks set to notice the banking sector are issues rebounded in 2017. align their strategy in a customer an impact resulting from a credit that continue to be a challenge — One aspect that continues to centric environment. The subtle model recognising ‘expected loss’ as the sector builds its pace. underpin the banking sector’s move from ‘customer service’ to rather than the previous ‘incurred All Executives have said they performance is the strength of its ‘customer experience’ is crucial loss’. BNZ is on the forefront of will continue to digitise their balance sheet. to ensure that overall customer implementation and impacts have offerings. Some survey participants In some respects, the year appears — In contrast to 2016, the banking satisfaction is reached. been felt on their bottom line. remarked that the most successful to have been as if it were one of two sector produced an impressive initiative would likely be in the halves. During the first half of the year, — Fintech continues to be a hot topic. A careful examination of the future increase in profitability. The form of partnerships with Fintech the advent of revisions to Australian The industry acknowledges that reveals that the banking sector is combination of growth in net start-ups, as banks do not have Prudential Standards (APS) 110 Capital one major aspect of customer facing a time of increased challenges interest income and non-interest the time, money, or resources Adequacy and APS 120 Securitisation centricity is appropriately aligning and uncertainty. income, as well as a significant to successfully create their led to intense competition for Fintech with the needs and wants increase in asset quality, has — Two prospective areas of prime own projects. deposits, thus resulting in some of customers. Although customers contributed to this record result. interest will be how the new banks refinancing and altering internal have emphasised that digital — In regards to Fintech and These changes outweighed the government operates during its policies while slowing their lending solutions and Fintech are priorities digitisation, although having an John Kensington increase in operating expenses. first year in office and how possible books’ growth. Meanwhile, the second when choosing a bank, any issues automated online process is Partner – Audit — The sector margin decreased by new legislation changes (such as half of the year saw lending growth that arise, however, must be desirable, when an issue goes Head of Banking and Finance 9 basis points (bps) from 2.17% to exclusion of foreign investment accelerate again, although more slowly handled with efficiency and by a awry, customers want to talk to KPMG 2.08%. This decline was caused home ownership, the impact on than historic levels. The New Zealand human (if necessary). Most banks a person and help them resolve primarily by increased competition immigration numbers and the economy still remains strong in spite of agreed that a successful Fintech the issue at that moment rather on the lending side offset with possible flow on to tourism) will some uncertainty, particularly around launch or uptake would involve than read a webpage of frequently partial relief on the funding side. impact on the economy and the issues pertaining to the housing market partnerships with overseas-parent- asked questions. Fortunately, banking sector. and construction. Nevertheless, other — Asset quality is going from owned innovation labs or with banks are beginning to recognise pockets such as tourism, and the strength to strength with the ratio Fintech start-ups. — The local regulatory space is going this trend and note that the primary sector performed well on the of total provisions to average gross — One area that always provides to grow and gain momentum customer experience cannot be back of stronger commodity prices loans and advances decreasing animated discussion is regulation. with a number of changes that a branch solely full of automated and a weaker NZD. Unemployment 5 bps this year. This reduction, The current period has been no will soon come into effect, as the machines yet. is at an all-time low. Views remain combined with a significant decline exception. At present, outsourcing RBNZ’s dashboard approach starts mixed around the potential effects in impairment expense due to still remains the biggest area of being used, the outsourcing policy arising from some of the new coalition banks tightening their selection focus.