FIPS FINANCIAL INSTITUTIONS PERFORMANCE SURVEY REVIEW OF 2015
THE CONTINUED STRENGTH OF THE BANKING SECTOR DRIVES THE REST OF THE NEW ZEALAND ECONOMY Contents
2 The Survey 4 A KPMG view from the editor 6 BANKING INDUSTRY OVERVIEW 8 Registered banks – Industry overview 22 Registered banks – Timeline of events 26 Registered banks – Sector performance 42 Registered banks – Analysis of annual results 48 Major banks – Quarterly analysis 52 Moving beyond disclosure to put conduct at the top of your priorities 54 Conduct and culture: at home and away 58 Resilient banks, a resilient economy 60 Low interest rate environment – an earnings challenge for Banks in 2016 64 There is no other choice but to invest in the future 68 New Zealand banks must embrace the Fintechs 72 BEPS – latest developments for financial institutions 76 Banking industry forecasts 84 NON-BANKING INDUSTRY OVERVIEW 86 Non-banks – Industry overview 92 Non-banks – Timeline of events 94 Financial Services Federation 98 Non-banks – Sector performance 106 P2P lending 111 Looking back at the non-bank sector 112 Non-banks – Analysis of annual results 116 Tackling cyber threats – three key priorities for financial institutions 120 Registered banks – ownership & credit ratings 121 Non-banks credit ratings 122 Non-banks ownership 122 Descriptions of the credit rating grades 123 Definitions 124 Endnotes 125 KPMG’s Financial Services Team 126 Contact us KPMG’s Financial Services team provides focused and practical audit, tax and advisory services to the insurance, retail banking, corporate and investment banking, and investment management sectors. Our professionals have an in-depth understanding of the key issues facing financial institutions. Our team is led by senior partners with a wealth of client experience and relationships with many of the market players, regulators and leading industry bodies. 2 | KPMG | FIPS 2015
The Survey
For the non-bank sector participants, and disclosure statements for each the threshold for inclusion in the organisation, with the exception of Our Financial Institutions survey has remained at total assets of certain information provided by the Performance Survey (FIPS) $75 million. survey participants. A limited number of participants provide us with audited th First Mortgage Trust and Nissan of 2015 marks the 29 year financial statements that might not Financial Services New Zealand Pty otherwise be publicly available. we have provided industry Limited are the latest entities to be commentary and an analysis welcomed into the non-bank sector We wish to thank the survey on the performance of the survey this year. participants for their valued contribution, both for the additional Fisher & Paykel Finance Group New Zealand registered information they provide and for the changed their balance date in 2013 banks and non-bank financial time made available to meet with us to from 31 March to 31 December, which discuss industry issues. institutions together with means the comparatives presented for topical articles from the Fisher & Paykel are for a 9 month period Massey University continues to be a ended 31 December 2013. The sale of stakeholder in the survey, assisting sector’s participants. different businesses of GE Capital that with the data collection and analysis, have occurred during the 2015 year as well as drafting the forecasting have not affected the way these entities section of this survey. We thank them are reported in this year’s survey, as for their continued contribution. the financial statements used for Continuing the theme from last The survey covers balance dates GE Capital are as at 31 December year, we are delighted to again have between 31 October 2014 and 2014. At that time, the entity had commentary from the Financial 30 September 2015. This has once not commenced its sell down. There Markets Authority (FMA) and the again resulted in registered banks will be a significant impact in next New Zealand Bankers’ Association with the balance date of 31 December year’s survey from these disposals. (NZBA). In addition, we welcome having their 31 December 2014 results This year we continue to disclose the contributions in this year’s survey from included in this year’s survey as individual GE entities separately below the Financial Services Federation (FSF). their most recent results. The banks our analysis of financial statements We have supplemented their external affected by this are Bank of China, table for information purposes (see thought leadership commentary with China Construction Bank, Citibank, page 112). Hopefully next year we some of KPMG’s own business line Deutsche Bank, Industrial and will welcome the results of the ’sold thought leadership. We trust you find Commercial Bank of China, JPMorgan entities’ in their new ownership. Chase Bank, Kookmin Bank, Rabobank the content of this survey of interest. and The Hongkong and Shanghai As has been the case with previous If there are any issues or matters Banking Corporation. surveys, all information used in included in the document that you wish compiling our analysis is extracted to discuss in further detail, please do We welcome two new registered from publicly available annual reports not hesitate to contact us. banks to this year’s survey, with China Construction Bank New Zealand Limited obtaining registration on 15 July 2014 and Bank of China TABLE 1: Movements New Zealand Limited obtaining Who’s out Who’s in registration on 21 November 2014. • Bank of China New Zealand Limited Both banks are subsidiaries of their 1 Nil Banks: 25 • China Construction Bank New Zealand Limited much larger parents operating in China which are the second and fourth • First Mortgage Trust largest banks in the world, respectively, Non-banks: 23 Nil • Nissan Financial Services New Zealand Pty based on total assets in 2015. Limited FIPS 2015 | KPMG | 3 4 | KPMG | FIPS 2015
A KPMG view from the editor
The banking sector has improved So ‘where to from here’ for the its overall capital adequacy ratio by New Zealand banking sector? At the Each year when I review the 72 basis points (bps) to stand at risk of sounding a little like a stuck performance of the banking 13.16%. The only slight blemish on record, the New Zealand banking the result has been an increase in sector is well-poised to continue sector, there is a recurring the impairment provisioning, but to grow. However it does face theme; banks have made a that represents more of a return some headwinds: to normalisation. record profit, but there remains • The impact of a prolonged lower challenges ahead. And every Why have our banks performed so dairy pay-out is a significant well in challenging global times? The year, the results get stronger. challenge. There is still some answers are many and varied: concern around this, and the
• The New Zealand economy never level of debt that the industry has Economic conditions rose to the same dizzy heights as to service. continued to remain positive did some global economies in the • To date, there has been sufficient throughout most of 2015. mid-2000s; so when the global liquidity globally chasing yield to financial crisis (GFC) arrived, it didn’t Up until the final weeks ensure adequate funding. While have so far to fall. the New Zealand banks remain of 2015, when volatility • Post-GFC, the New Zealand banks well above the Reserve Bank of returned to global markets, never found themselves in a New Zealand (RBNZ or Reserve position where they needed to be the New Zealand economy Bank) core funding ratios, they still recapitalised or bailed out. This has are exposed to the global markets had enjoyed a strong ride meant that, as the New Zealand they draw significant funding from. compared to the rest of the economy has recovered more quickly in comparison to foreign • One of the major issues many world. That is not to say that economies, the banks have been at banks will have to face in the it had not faced some issues the forefront of that recovery. current period is the potential around dairy prices, challenges • The Auckland housing market regulatory impact from the Reserve (perhaps slightly artificially) has Bank’s proposed outsourcing rules. in Asian markets (in particular boosted the economy, as has The Reserve Bank is clarifying China), and the impact of the rebuild in Christchurch and its position on outsourcing, and Europe. Our economy’s new development in Auckland. requiring systemically important Throughout this period, banks to bring key operations strong performance has been New Zealand employment levels onshore. The Reserve Bank is more than replicated by the have improved slightly. looking to ensure that it can – if banking sector. This year sees • Our banks have been in a position necessary, in the event of a global or regional issue – control a bank New Zealand banks record a to allow their customers to transact freely. Customers had been able fully onshore. From the banks’ net profit of $5.17 billion based to deposit and borrow from banks, perspective, they will argue that on margin growth of four and engage in trade activities or part of the reason they have been derivative products. so efficient is that they have set up basis points, lending growth global centres of excellence where • During the period post-GFC, there are workforces capable of of 7.11%, and a reduction New Zealand’s regulatory in the operating income to environment has moved or changed providing the labour and expertise operating expense ratio to a very quickly. The banks have proven required. This has allowed them to very adept at implementing new reduce the pricing that is passed on low of 37.32%. regulations and ensuring their to consumers in the local economy. compliance with them. FIPS 2015 | KPMG | 5
No survey of the last five years would 3. The global economy continues to be complete without a comment on stumble along. The constant threats the Auckland property market. It has of deflation and various economies continued to rise at rates amongst defaulting creates a very challenging the highest in the world, such environment. All Executives we that Auckland is now the 4th most spoke to are doing everything they unaffordable city in the world (hardly an can to avoid being a casualty in any achievement to be proud of). The basic future economic crisis. structural problem is one of supply and 4. As if that is not enough, the demand. There is currently insufficient industry is facing unparalleled stock of dwellings, and net migration is such that more people are flooding to challenges from disruptors in Auckland than houses are being built. the form of new fast-moving The Reserve Bank has implemented internet-based businesses. These various regulatory measures. These businesses are most prevalent include the loan-to-value ratio (LVR) where there is a chance to expedite rules (the 80% rule, and the 70% the interaction with the customer, and where there is sufficient rule for investors); the requirement John Kensington to have a domestic bank account and margin that it can be shared an IRD number; and other tax rules between the disruptor and the Partner – Audit around taxing profits on the sale of customer. Financial institutions are Head of Financial Services properties within two years. While the increasingly aware that they need to KPMG initial impact of these rules has been join the disruption business if they to slow down the level of settlements, are to survive. they haven’t really adjusted the prices 5. Customers want to interact John has been with KPMG’s downwards. Many commentators digitally, which is driving the need Financial Services audit team for believe that it is only a matter of time to constantly be making everything 30‑plus years, 17 of these as a until work-arounds to these rules one click away. partner working across a wide emerge, or significant amounts of range of financial services audit capital are released from Asia. 6. When it comes to regulation, the biggest risk is the ‘unknown’ of clients, specialising in banks and Looking to the future for banks, they the regulatory response to another finance companies. are faced with many of the challenges event such as a GFC, and whether John has a wealth of experience in that any global business faces. The six it will be an appropriate reaction or auditing and accounting for banking main strategic worries faced by bank an over-reaction. Executives globally are all present in products and services including the New Zealand market. Finally, these risks have become treasury, retail offerings, corporate increasingly interrelated. Where an loans and loan provisioning. He 1. Cybersecurity risks and cybercrime entity suffers an impact from one of is currently Head of KPMG’s remain an ever-present threat. them, it is more than likely to suffer Financial Services team, Financial These risks evolve quickly, an impact from others at the same Services Audit and editor of this change radically, and threaten the time. In summary, the New Zealand publication. John is also a Trustee profitability and reputation of any Financial Institutions can be incredibly of the Kidscan Charitable Trust, financial services business. proud of the 2015 result. Once again, deputy chairman of the New Zealand 2. Conduct risk has an ever-increasing the sector can look to its banks as the Auditing and Assurance Standards presence both globally and locally. well-run businesses at the centre of Board (NZAuASB). John is also a Hopefully New Zealand businesses New Zealand’s economic engine. member of CAANZ and the Institute can learn from international of Directors. episodes; and avoid some of the damage that is being done by the conduct itself, its remediation costs and social media’s reporting of it. 6 | KPMG | FIPS 2015
BANKING INDUSTRY OVERVIEW FIPS 2015 | KPMG | 7 8 | KPMG | FIPS 2015
Registered banks – Industry overview
The banking sector has had MOVEMENT IN NET PROFIT another record year and 1 AFTER TAX navigated its way successfully through – dairy price volatility, $MILLION Chinese market movements, 7,000 and further regulatory impost. 6,000 It stands as one of the 5,000 strongest banking sectors 4,000 in the world and one of the 3,000 most successful. 2,000
1,000
0 2014 NET NON- OPERATING IMPAIRED TAX 2015 NET PROFIT INTEREST INTEREST EXPENSES ASSET EXPENSE NET PROFIT AFTER TAX INCOME INCOME EXPENSES AFTER TAX
Profitability continues on an by an increase in impaired asset upward trend underpinned expense of $173.08 million or 65.33% by strong asset growth in the current survey period as the coupled with slight margin reversals of historical provisioning we improvement had seen in the past came to an end. This is seen by many in the industry The New Zealand banking sector as being reflective of the slow return recorded another year of strong to a normalisation of impairment performance with profits up 6.94% to charges from the period post the GFC reach an all-time high of $5.17 billion. where higher levels of impairment were required. Lending growth was very much driven by the continued 1 SEE FIGURE 1 – PAGE 8 momentum in the housing market that saw the median house price in • Auckland rise by 13.57%. The banking sector has achieved steady year-on-year growth in profits, having increased net interest income 10 SEE FIGURE 10 – PAGE 17 on the back of growing lending books and improving cost efficiencies (see • Figure 10). Lending has continued to Continued cost discipline also drove grow at an increasing pace for the significant operating efficiencies past five years. This was undermined with operating expenses relative to FIPS 2015 | KPMG | 9
operating income declining by 212 bps and 47). Total Capital adequacy feel the implementation of NZ IFRS 9 to 37.32% (see Table 3 – page 27). ratios and Tier 1 Capital ratios have Financial Instruments will lift provision These factors in combination with risen to record highs of 13.16% and levels even higher. a relatively stable New Zealand 11.86% respectively, well above the economy have created a positive minimum requirement set out by the As the global supply of dairy environment for banks to continue RBNZ. Furthermore, additional LVR products has continued to outstrip gaining momentum. restrictions introduced by the RBNZ demand resulting in prices once strengthened the quality of bank loan again falling. books with the proportion of loans over The New Zealand banking sector 80% LVR declining from 15.72% to recorded another year of strong 13.17% for the five major banks in the In the current survey period, impaired performance with profits up 12 months to September 2015. Our asset expense as a ratio of average 6.94% to reach an all-time high of non-bank sector survey participants gross loans and advances has $5.17 billion. noted this was an area where they had risen from 0.08% to 0.12% (see seen less intense bank competition. Table 5 – page 30) on the back of a This year has been another impressive $173.08 million increase in impaired Forecasts by our survey partner assets. Of the two major threats to Massey University show that total year for the banks, achieving new records and improving several credit quality that were mentioned in industry lending is to continue growing the prior year’s survey, being the dairy at a reasonable pace over the next performance metrics. However, the future brings considerable uncertainty industry and house price inflation, two years while net interest margin both still remain. However, dairy has is expected to decline slightly due to around just how prolonged the impacts of depressed dairy prices will probably become the more immediate higher competition. Credit loss rates concern with much uncertainty as to are also forecast to increase slightly be, the recent global market volatility impacting funding costs, and the ever- when dairy prices will recover and just over the next two years, however will exactly how the industry is placed to present threat of a sharp correction in still be low due to the rigorous lending handle a more prolonged downturn. policies of the banks (see Tables 12 Auckland house prices. and 13 – page 82). Normalisation of loan Competition for quality credit impairment charges 21 SEE FIGURE 21 – PAGE 37 continues to be fierce and has not eased with the banks continuing to Improvements in asset quality metrics explore new avenues to maintain have been a key theme for the banks • As the global supply of dairy products margins outside of their traditional since the height of the GFC with the release of provisioning adding to the has continued to outstrip demand lending segments. Despite the intense resulting in prices once again falling competitive pressures in the market, profitability of the banks each year. While asset quality has remained at the Global Dairy Auctions in the net interest margins have increased first month of 2016, Fonterra has by 4 bps to 2.28% (see Table 4 – strong in the current survey period, the slight deterioration observed in some again re-forecast the Farm gate Milk page 28), with return on assets (RoA) Price downwards in late January to credit quality metrics indicates that the and return on equity (RoE) ratios $4.15 per kgMS from the $4.60 per low levels of impairment charges may slipping slightly by 1 bp and 17 bps kgMS that was forecast in December. be coming to an end. This likely means respectively due to increasing capital This will come as dire news for dairy that the bottom of the credit cycle has requirements (see Table 5 – page 30). farmers, with as many as 80% already been reached and we are now seeing estimated to generate negative cash The banks have consolidated their more normalised levels of impairment flows before the cut to $4.15 per balance sheet positions further in the charges. In addition, the growth in loan kgMS was announced, according to face of economic volatility in both books has and will continue to carry an RBNZ report2. Unfortunately for global and local markets and additional increases in collective provisioning dairy farmers it appears prices are to regulatory requirements (see pages 46 while many industry participants also 10 | KPMG | FIPS 2015
remain depressed for the immediate stress testing scenarios it can be The risk of a sharp correction in house future as supply of dairy products seen that provisioning will begin to prices is therefore still a concern continues to grow from both Europe increase significantly should the price given the banking sector’s significant and the US. Additionally, the Chinese not recover for an extended period exposure to the property market. economy, which is the world’s largest of time2. Comments by Executives consumer of dairy products, continues indicate that many of the banks have to slow down. already commenced reviews of their 4 SEE FIGURE 4 – PAGE 11 largest exposures in an attempt In an attempt to help mitigate the to identify and work with potential situation, Fonterra announced interest problematic loans. • free loans to dairy farmers of 50 cents As a result of the continued rise per KgMS produced during the period in prices), further measures were 1 June 2015–31 December 2015. Auckland is now considered to be implemented late last year, most As of late last year specific and the fourth most unaffordable city in notably by the RBNZ and the collective provisions relating to dairy the world. New Zealand Government, which loans based on data obtained by the have been further covered in the RBNZ were sitting at 0.1% and 0.6% ‘Regulation’ section (see page 14). respectively of total dairy lending. Rapid house price inflation has been Stress testing undertaken by the RBNZ the subject of intense media coverage indicates that in a situation where milk over the last few years as prices in 2 SEE FIGURE 2 – PAGE 11 prices recover to the mid $5.00 per Auckland have risen to the point where kgMS range in the 2016/2017 season Auckland is now considered to be the fourth most unaffordable city in the • and experience marginal growth in The Auckland housing market has world. The RBNZ has been actively the years thereafter, non-performing had a relatively cool start to 2016 with trying to combat the rampant rise loans are estimated to increase to falling auction clearance rates and in house prices within the Auckland around 7.8% of initial sector debt reduced sales volumes. Whether the property market with the introduction by 2018/19. This is compared to a newly implemented measures, which of LVR ratio restrictions in October scenario where the dairy price is not aim to dampen demand, have an 2013. While the restrictions have had expected to recover in the 2016/2017 impact in the long term will be closely an impact particularly in reducing season and experience marginal monitored by the banks and the RBNZ, lending in the over 80% LVR bracket, growth in the years thereafter, where particularly with many commentators these measures have not been non-performing loans are estimated predicting it is only a matter of time strong enough to combat the market to increase up to 44% of initial sector before a new wave of capital is forces driving property prices, being a debt. While provisioning relating released from Asia. to dairy loans currently remains demand that outstrips supply caused below levels observed in the years by years of insufficient houses being In addition, the implementation of immediately after the GFC, from the built while immigration remained high. NZ IFRS 9 may result in considerable changes to banks’ impairment testing models, as the accounting standard TABLE 2: replaces the existing ‘incurred loss’ 2012 2013 2014 2015 Registered Banks – Non-performing Loans model with the ‘expected credit loss’ model. Under the revised approach, it Past Due Assets to Gross Loans and will no longer be necessary for a loss 0.34% 0.27% 0.19% 0.19% Advances event to occur before an impairment loss is recognised. Expected credit Gross Impaired Assets to Gross Loans and 1.19% 0.87% 0.66% 0.48% losses would be measured as the Advances present value of all cash shortfalls over Total 1.53% 1.14% 0.85% 0.67% a measurement period. The general FIPS 2015 | KPMG | 11
$ HISTORICAL TREND: 900,000 2 MEDIAN HOUSEHOLD SALE PRICES (3 MONTH 800,000 AVERAGE) IN AUCKLAND 700,000 AND NEW ZEALAND OVER 10 YEARS 600,000
500,000
400,000
NEW ZEALAND 300,000
AUCKLAND 200,000 WELLINGTON 100,000 CANTERBURY/WESTLAND 0 SOURCE: REINZ 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
% SIX MONTH TERM DEPOSIT 4.5 3 RATE VS OCR 4.0
3.5
3.0
2.5
2.0
1.5
1.0 OCR 0.5 SIX MONTH TERM DEPOSIT RATE 0.0 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS DEC 14 FEB 15 APR 15 JUN 15 AUG 15 OCT 15 DEC 15
REGISTERED BANKS: 4 SECTORAL ANALYSIS OF CREDIT EXPOSURES AS AT 30 NOVEMBER 2015
AGRICULTURE, FORESTRY, FISHING AND MINING 15% (2014: 16%) MANUFACTURING 3% (2014: 3%) ULTILITIES 2% (2014: 2%) CONSTRUCTION 1% (2014: 1%) OTHER COMMERCIAL LENDING 17% (2014: 16%) FINANCE, INVESTMENT AND INSURANCE 5% (2014: 5%) GOVERNMENT AND PUBLIC AUTHORITIES 2% (2014: 2%) MORTGAGES 52% (2014: 53%) PERSONAL LOANS 3% (2014: 3%)
SOURCE: RBNZ, S7 –CLAIMS BY SECTOR, ANZSIC DIVISION – REGISTERED BANKS 12 | KPMG | FIPS 2015
consensus is that it will increase the search for yield particularly in high Looking at 2016, global equity provisioning levels. interest markets such as New Zealand. markets have started by plunging Another driver of the favourable into a state of apprehension. Until Funding mix continues to conditions has been the monetary such time as confidence is restored, improve easing policies introduced by some this could potentially be a benefit for of the world’s largest economies any banks looking to raise funds in The banking sector has continued in an attempt to stimulate growth global wholesale markets if investors to improve its funding profiles in the and combat deflationary pressures. begin to move their money to what current survey period, as local deposits Market conditions were echoed is seen as “safer” investments such have continued to experience growth in remarks made by Executives as lending, but provided spreads do (see Figure 22), albeit no longer who commented on their ability to not increase significantly. Combined exceeding the growth in lending based obtain wholesale funding as and with the potential for further OCR cuts on RBNZ data. This has resulted in a when required at reasonable rates in the local market, the banks may further improvement in the RBNZ Core in the early and middle parts of the see continued favourable conditions Funding Ratio which for the industry year. We note however that market in which to source funding at least as a whole substantially exceeds the volatility in the last weeks of 2015 saw through the early part of 2016 if they regulatory minimum of 75%. some of this favourable liquidity and can re-price quickly enough to take pricing evaporate. advantage of any rate reductions.
22 SEE FIGURE 22 – PAGE 37 The environment continues Looking at 2016, global equity to be highly competitive markets have started by plunging • into a state of apprehension. The story around competition Despite an improving funding continues to show recurring themes profile, when compared against their from last year, with the addition of overseas counterparts, the level of new market entrants in the banking and reliance on short-term offshore Despite the favourable conditions in global wholesale markets and a sector contributing to an already funding still remains relatively high highly competitive environment. For and exposes a vulnerability of the combined 100 bps decrease in the RBNZ’s Official Cash Rate (OCR) Executives, the challenge ahead is New Zealand economy which has to be able to protect profit margins not been missed by rating agencies observed in the last half of 2015 as the RBNZ sought to combat deflationary against the threats that greater in recent comments. The short-term competition brings. nature of offshore debt exposes the pressures, the cost of funds marginally New Zealand banks to volatility in increased in the current survey period from 3.67% to 3.87% (see Figure 14). global funding markets, which could Competition in the loan market is This is likely due to the fact that the threaten to reduce the supply of funds heating up. and push up borrowing costs, placing a reported results of the banks with strain on the banking sector. December, March and June balance dates do not reflect the impact of With lending growth of 7.11% (which In instances where the banks have decreases in the OCR which only is the fastest pace observed in the last needed to obtain wholesale funding, commenced in June. Some banks five years), we are seeing continually conditions earlier in the year have also had funding at favourable rates more aggressive loan writing practices been generally favourable despite roll off that could not be replaced with taking place (see Table 5 – page 30). an increase in volatility and funding equivalent rates. spreads. Global wholesale funding Executives have commented that markets have remained relatively liquid deals are now being made which and the cost of wholesale funds at in usual situations would not be SEE FIGURE 14 – PAGE 29 levels close to that observed before 14 economically justified. The rationale the GFC in 2008, as global investors being that some banks are seeking • to either grow their underweight FIPS 2015 | KPMG | 13
loan books in a particular sector, lenders are more of a concern to non-bank lenders, in effect indirectly maintain current market share, and/ the non-banks sector as they have lending to their customers through or establish client relationships to continued to focus their operations the entity while taking some comfort cross-sell additional products with mainly on small unsecured lending from the non-bank lender both in higher margins. Competition in the for vehicle, business or personal terms of the capital they contribute loan market is heating up to the point loans (see page 106). The banks have and their pre-existing relationships that many participants mentioned however acknowledged that future and processes they have already they are starting to fall below RoA collaborations with P2P lenders established. One such example is the and RoE requirements for specific may in fact be beneficial in gaining a securitisation programme between lending. Increasingly we are seeing competitive advantage. One aspect Westpac and Credit Union South debt consolidation style arrangements P2P lenders have been able to excel implemented in November 2015. being offered, which are very in is integrating interactive digital Another similar avenue for the banks attractive for borrowers due to their technologies into their front end is to provide wholesale funding to P2P simplicity, with very low interest rates platforms to enhance the user’s lenders which could be viewed more in an attempt to move customers experience. A partnership with a P2P as bringing new lending opportunities from competitors. lender could allow banks to strengthen rather than being merely competitors their front end operations creating or disruptors, as is the case between Outside of retail lending where operational efficiencies, enhancing Harmoney and Heartland Bank. As the competitive pressures are well the customer experience and possibly P2P market continues to gain traction documented and reported on, the changing the way mobile banking with all four currently licensed P2P competition has been heating up in is understood and conducted today lenders now in operation, this could the corporate and commercial lending through innovative solutions. At present significant opportunities for sectors with the entry of Bank of present, P2P lenders are targeting banks to grow their loan books in the China and China Construction Bank at areas that suit them, which is both non-traditional space. the end of 2014. They have since gone where the process can take time in on to write over $366.06 million in Outside of lending there has also been other traditional channels, so there is loans as at 30 September 2015. Some significant competition in relation to an ability to speed up the customer Executives have commented on the banking service contracts this year, experience, and also where there is a noticeable impact of their presence in with several coming up for renewal sufficient margin to provide the service the market in terms of the number of or tender. Westpac retained the bulk at a competitive price by sharing the deals and client relationships that they of the ‘All-of-Government’ banking margin. They will, in the near future, have been part of. However, their local services contract after four years of remain clear of areas where banks can incorporation status means they are negotiation, with the contract having drive real economies of scale, raising subject to restrictions on related party been put out to tender for the first and lending large amounts of money exposures imposed by the RBNZ as time in 25 years. Five other banks at very competitive rates. For now the part of their conditions of registration. were also given parts of the 8 year higher margin products will be where This can be a disadvantage when contract including Citibank which they target their high speed digital compared to a branch structure that will provide foreign exchange and invasion. allows access to significant pools card services. Westpac became Air of related party funding, and could In a response to the competitive New Zealand’s Airpoints partner, prove to be an impediment to growth environment, we have commented in signing a 10-year deal with Air if funding cannot be obtained from the past that banks have been willing New Zealand, with Airpoints to be alternative sources. to enter non-traditional markets such offered on four of their MasterCard as the non-bank sector, where the credit cards. In relation to P2P lenders, the banks competitive pressures are not so high, do not currently see them as a major to support growth and help alleviate threat to their business as they margin pressure. Recently the banks have for the most part kept out of have shown a willingness to provide their traditional lending space. P2P wholesale or securitised funding to 14 | KPMG | FIPS 2015
Regulation continues to be a Impacts of tighter LVR restrictions for banks globally. Interestingly, the hot topic were combined with new tax rules RBNZ appears to have seen some which came into effect on 1 October, unintended consequences of AML The RBNZ continued to be proactive, aimed at helping to dampen the legislation, having issued a formal having commenced a number of demand for Auckland property. The statement early this year about its regulatory initiatives to ensure the new tax rules encompassed the concerns over widespread closures New Zealand banking industry is well ‘bright line’ test which imposes capital of accounts for money remitters as prepared for any large scale economic gains tax on investment property a means of potential ‘de-risking’ by downturns. Although regulation is sold within two years, and the new New Zealand banks to comply with generally perceived with a mixture of requirement for all property buyers AML requirements. support and reluctance by the banks, and sellers to have a New Zealand IRD the pace of regulatory changes has Following a recently completed number and bank account. As could be posed significant strain on resources outsourcing stocktake, the RBNZ expected, several Executives reported and has come at a high cost. There has commenced a review of the a notable influx in deals being done in is a feeling among Executives that at outsourcing policy applicable to ‘large’ the months before the new rules came times regulation is imposed without banks (defined as locally incorporated into effect, with an easing in volumes thorough consideration of potential banks with New Zealand liabilities of seen afterwards. impacts, or proper assessment of more than $10 billion). This review aims reasons prompting change. However, to enhance banks’ ability to provide the banks remain well placed to If Asian capital is unlocked it will basic banking services in the event of cope with regulatory developments breach the dam. separation from its parent or failure of and Executives recognise that these a service provider, and to ensure clarity are needed to help strengthen the and consistency across banks in the banking sector. The general consensus among application of the outsourcing policy Executives has been that the new LVR interpretation of ‘core’ functions. speed limits and new tax rules have The pace of regulatory changes The proposal includes an express had a positive impact, strengthening has posed significant strain on requirement for a separation plan banking system stability, improving resources and has come at a for subsidiaries of overseas owned the credit quality of loans and making high cost. banking groups; a list of functions that borrowers more responsible as they cannot be outsourced; and considers are now forced to consider foregoing whether the threshold used for the discretionary spend in order to secure This year the RBNZ has introduced outsourcing policy should match that a property. Whether it has a prolonged new LVR speed limits, specifically of the Open Bank Resolution (OBR) impact on house prices remains to be targeting Auckland investment policy of $1 billion. seen, with many we spoke to saying a property loans. In its Financial Stability way around it will be found by various It would not be overstating the Report released in November 2015 the promoters, and if Asian capital is situation to say that the stance RBNZ has pointed to a growing risk of unlocked it will breach the dam. taken by the RBNZ is concerning a correction to Auckland house prices to the industry, as there has been and the significant impact this could Compliance with Anti-Money considerable resource spent setting have on financial stability. Thus, tighter Laundering (AML) legislation has up the outsourcing operations with a restrictions have been introduced as received much attention, with several view of achieving cost efficiencies, and of 1 November on lending to Auckland Executives reporting having undergone centres of excellence in areas where property investors in an effort to curb AML audits or reviews, with no knowledgeable resources are scarce, Auckland’s rapid house price inflation major non-compliance issues arising. and has been perceived by some and strengthen the credit quality of Looking forward, AML is expected Executives surveyed as an apparent banks’ loan books by reducing the to continue to feature as one of the turnaround from their previous proportion of riskier mortgage loans. key compliance concerns in the position. The worst case scenario banking sector and remains as such of having to bring these functions FIPS 2015 | KPMG | 15
% OCR VS FIXED AND FLOATING 7.0 5 MORTAGE RATES 6.0
5.0
4.0
3.0
2.0 TWO-YEAR FIXED RATE FLOATING RATE 1.0 OCR 0.0 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS, DEC 14 FEB 15 APR 15 JUN 15 AUG 15 OCT 15 DEC 15 S8 BANKS: MORTGAGE LENDING
$MILLION FIXED VS FLOATING 180,000 6 MORTGAGES: VALUE OF LOANS 160,000
140,000
120,000
100,000
80,000
60,000 RESIDENTIAL MORTGAGE LOANS – FIXED 40,000 RESIDENTIAL MORTGAGE LOANS – FLOATING 20,000 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS DEC 12 MAY 13 OCT 13 MAR 14 AUG 14 JAN 15 JUN 15 NOV 15
% MAJOR BANKS: COST OF 5.0 7 FUNDS VS OVERNIGHT INTERBANK CASH RATE 4.5
4.0
ANZ 3.5 BNZ CBA + ASB 3.0 KIWIBANK WESTPAC 2.5 AVERAGE OVERNIGHT INTERBANK CASH RATE 2.0 2011 2012 2013 2014 2015 16 | KPMG | FIPS 2015
back onshore would be very costly equity exposures to their New Zealand the banking culture to ensure that (estimated to be in the hundreds banking subsidiaries to be below a customers are treated fairly due to of millions according to an affected limit of 5% of the bank’s Tier 1 Capital increased operational and reputational bank in the big four). ratio with a transition period of five risks that any slip ups may bring to years commencing from 1 January the business. In addition, some Executives 2016. This limit does not apply to questioned as to whether this would the New Zealand branch itself as actually produce better outcomes, as it is within the Extended Licensed There has been an increased outsourcing enables banks to focus Entity (which comprises the parent awareness of conduct risk on core competencies and enjoy and its subsidiary entities approved management among Executives. technology and practices that may by the APRA for the purpose of not otherwise be locally available. measuring capital adequacy) but will In addition, the risks of complete have an impact on the New Zealand Effective conduct risk management supplier failure or bank failure aimed branch’s non-equity exposures to must be embedded in the workplace to be mitigated by potentially moving other members of the New Zealand culture as people need to become some functions back onshore were Banking Group. Further, another accustomed to recognising situations perceived as more remote than piece of regulation currently under that potentially give rise to conduct the risks that may be mitigated by consultation is the introduction of the risk and making the right decisions. outsourcing such as a natural disaster proposed Basel III long-term liquidity This can become challenging for or technology failure that would have reform (Net Stable Funding Ratio). organisations as it can be difficult a greater adverse impact if all critical This is intended to be introduced in to overcome set behaviours that functions ended up in one place. January 2018, which will affect the have previously been considered The potential flow-on impacts funding profiles currently held by acceptable. Views shared by the could create issues with capital the banks, lengthening the banks’ Executives have been that it is movements within entity structures funding maturities and reducing imperative to have more disciplined in the event of branch, subsidiary and reliance on short-term wholesale lending and sales processes and the parent failure, which could in turn funding from offshore. Additional right people. Some reported having lead to New Zealand banks being capital requirements may be simplified their product offering in deprived of significant amounts of introduced by APRA as they have yet response to conduct risk concerns potential funding. not made any decision on other key and to avoid being seen as mis-selling recommendations by the FSI. products to customers. The alleged Some Executives interviewed have mis-selling of interest rate swaps to expressed concerns about uncertainty At present APRA has expressed the rural customers involving some of the surrounding existing Trans-Tasman view that any strengthening should major banks illustrates the importance funding structures and the use of be done ‘over a reasonable transition of being seen as doing the right thing the branch networks to raise money period’ to minimise disruption by the customer and treating the due to recent developments across to banking operations, and thus customer fairly. the ditch that will see Australian mitigating any potential risks of capital banks being subject to greater outflows from New Zealand. Wealth products were seen as capital requirements. In July 2015, carrying greater conduct risk by many the APRA announced that the major Conduct risk at the forefront Executives due to the involvement Australian banks would be required of Executives’ minds of financial advisors who, albeit to increase the capital requirements being very well qualified, may be There has been an increased for residential mortgage loans in lacking experience in investment awareness of conduct risk response to the Financial Stability management. They have been trained management among Executives, Institute (FSI) recommendations to sell and not necessarily assess if the as New Zealand continues to catch effective from 1 July 2016. Late last product is the right fit for the customer, up with overseas trends. A lot of year, APRA also moved to change the which potentially exposes the bank to emphasis is being placed on changing limits of the Australian bank non- being accused of mis-selling products. FIPS 2015 | KPMG | 17
% REGISTERED BANKS: LENDING 30.0 8 GROWTH BY SECTOR 25.0
20.0
15.0
10.0
5.0 BUSINESS HOUSING 0.0 CONSUMER -5.0 AGRICULTURE -10.0 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS JAN 06 JAN 07 JAN 08 JAN 09 JAN 10 JAN 11 JAN 12 JAN 13 JAN 14 JAN 15
$MILLION RESIDENTIAL MORTGAGE 225,000 9 LOANS MATURITY PROFILE 200,000
175,000
150,000
FLOATING 125,000 < 1 YEAR 100,000 1>2 YEARS 2>3 YEARS 75,000 3>4 YEARS 50,000 4>5 YEARS 5 YEARS + 25,000 0 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS NOV 11 MAY 12 NOV 12 MAY 13 NOV 13 MAY 14 NOV 14 MAY 15 NOV 15
$MILLION REGISTERED BANKS: 14,000 10 PERFORMANCE ANALYSIS 12,000 10,000 8,000 6,000 4,000 2,000 NET PROFIT AFTER TAX 0 OTHER OPERATING INCOME -2,000 NET INTEREST INCOME TOTAL OPERATING EXPENSES -4,000 IMPAIRED ASSET EXPENSE -6,000 -8,000 2011 2012 2013 2014 2015 18 | KPMG | FIPS 2015
Some Executives expressed the view revealing that 80% of New Zealanders the ability to re-route settlements that managing conduct risk involves would no longer choose to do business via Australian operations in an event making a shift from a sales culture with an organisation that had a data of a significant cyberattack. In such to more of a meeting customer breach occur. cases, the short delay in processing needs culture. settlements could provide the opportunity to look at transactions Executives also commented that Lessons have been learned from more closely using data analytics tools conduct risk has indirectly exposed overseas with cyber hacking to identify any suspicious transactions. the lack of financial literacy amongst becoming a real threat to bankers Implementing such measures was many New Zealanders, with an globally. seen as a step towards not just increasing number of people not truly responding to cyberattacks, but also as understanding the mix of products a measure towards alleviating conduct they have and how they work. For While cybersecurity has long been risk concerns. example, some people do not seem a focus area for the banks, in recent to understand the basic concepts times it has moved to the forefront of interest rates, certain types of and is seen as a major risk along with Digital transformation is at the products such as reverse mortgages conduct risk by the Executives. forefront of Executives’ minds and or most importantly, risk involved banks continue to invest heavily Although New Zealand banks have when entering into deals. This lack in technology that keeps up with been somewhat sheltered thus far, of financial literacy leads to a lot of customer expectations. misunderstanding and misreporting. lessons have been learned from Further it creates a need for advisors overseas with cyber hacking becoming a real threat to bankers globally. to help these people, but they must be Several Executives suggested the Overseas experience has shown the remunerated fairly and must act in the possibility of setting up an all-inclusive considerable costs of cybercrime for customers’ best interests. task force, comprising of individual banks, with an estimated US$1 billion representatives from the banks, The continued evolution of having recently been reported as the regulators and the Government technology and the threats stolen from banks across the world Communications Security Bureau and opportunities this brings by an international cybercrime group (GCSB). Such a task force would called ‘Carnabak’. In a fast changing world of technology, provide greater transparency and data is increasingly perceived as Aside from monetary losses stemming collaboration in tackling cybersecurity carrying both enormous opportunities from cybercrime, there are greater threats faced by the banking industry. One example provided and significant threats. Competitive costs associated with reputational by the Executives was in a case advantages could be gained by risks that are much harder to quantify. where a bank discovered a security gathering customer insights to As banks grapple with managing breach, it would be able to alert improve customer experiences and massive volumes of transactions and other members promptly and pool to identify business opportunities. At sensitive data, against the backdrop resources to develop an effective the same time, managing significant of a continually evolving regulatory response. This would also provide volumes of data poses real threats in environment which requires system an opportunity for the others to take terms of cybersecurity and highlights and process modifications, data measures in anticipation and avoid the need to keep customer data security is expected to remain a major potential breaches. safe. In a recent survey performed by concern for the banks. Unisys Corp, 50% of New Zealanders Opportunities exist to leverage off believe a data breach would occur the technological capabilities within One of the big challenges with in the banking and finance sector in the wider global banking groups utilising data analytics identified by the next 12 months. A previous 2011 to strengthen data security for the Executives has been the cost versus survey highlighted the importance New Zealand subsidiaries or branches. benefit. of public confidence in data security, One example provided was having FIPS 2015 | KPMG | 19
Larger banks tend to have significant capabilities, while the back of the be relatively strong in comparison to resources devoted to developing more branch is where the detailed advice is global counterparts and still growing robust cybersecurity systems and given for more complex products. at a steady pace, it could be seen potentially more experience in dealing as unusual to observe deflation as with breaches given their global Economic outlook looking a a potential issue, as it is usually presence. Such a partnership would bit patchy associated with a period of extended enable smaller banks to leverage off recession. Weak inflation appears to The New Zealand economy has fared this, given their limited amount of be primarily driven by lower oil prices, relatively well amidst recent turbulence resources. However, many Executives with global oversupply resulting from in international markets, with feel that the uphill challenge in significant US oil production and the business and consumer confidence establishing such a task force is to refusal of oil producing nations to cut still up, low unemployment, record convince the larger banks to recognise back on supply. This ultimately shows high net migration in 2015 and a their stake and get them to see how the impact global factors can have on continued pipeline of construction they could potentially benefit. the New Zealand economy. activity indicating strength in the One of the big challenges with utilising domestic economy. Borrowers have been the real winners data analytics identified by Executives from declining interest rates during Over the second half of 2015 the has been the cost versus benefit, as 2015 with the floating rate and 2-year RBNZ cut the OCR four times for a the collection and cleansing of data fixed rate falling by 60 bps and 90 bps combined effect of 100 bps. This was needs to be performed in an efficient respectively (see Figure 5), while a complete reversal of OCR hikes in manner so it can be effectively turned deposit rates shifted downwards 2014, when New Zealand became the into valuable information. Given the following OCR cuts (see Figure 3) first developed country to start raising sheer volume of information, banks according to RBNZ data. interest rates as the RBNZ sought to are finding that considerable resource dampen inflationary pressures. A year needs to be employed in order to down the line and the environment obtain useful insights. now could not be any more different, 3 SEE FIGURE 3 – PAGE 11 Customer preferences are rapidly with the RBNZ now combatting evolving with technological potential deflation. According to • advancement challenging the Statistics New Zealand overall inflation Combined with intense competition traditional ways of doing banking. for 2015 was 0.1% which is the within the banking industry and liquid The digital and mobile revolution lowest level observed this century wholesale funding markets, we have represents both threats and and well below the RBNZ policy target seen record low mortgage rates being opportunities for banks. The traditional of 1–3%. offered to the market, particularly in ways of doing business at the the fixed rate space of between 4 and branch are now changing rapidly to 5%. With sub 4% rates appearing digital platforms and devices. Digital Borrowers have been the real briefly in 2015 and in anticipation of transformation is at the forefront of winners from declining interest further easing in the OCR, there is the Executives’ minds and banks continue rates during 2015. potential that mortgage rates below to invest heavily in technology that 4% could feature again in 2016. keeps up with customer expectations. An example would be branches Looking back at 2014, we see that where the front office is getting re- many of the factors that were 6 SEE FIGURE 6 – PAGE 15 designed and digitised. The branch is ultimately driving the economy perceived to be more efficient with and inflation are still present today, front office personnel providing advice such as rampant house price • and education to customers about inflation, the Canterbury rebuild and how to use digital services with their business confidence. Given that the own devices or available self-service New Zealand economy continues to 20 | KPMG | FIPS 2015
to spend more and propping up Bank Executives’ six main New Zealanders have continued to the economy. However, mounting strategic worries flock to fixed rate mortgages in the concerns over global growth, and current survey period. China in particular, appear to have Cybersecurity taken the focus away from the supply Security risks and cybercrime remain side and more towards the demand threats and while the New Zealand Referring to Figure 6, we see that side, where weak future growth banks have not been the target of New Zealanders have continued to prospects may be contributing to any significant cybercrime yet, we flock to fixed rate mortgages in the declines in stock markets. have seen a few of their overseas current survey period, with the vast counterparts already become victims. majority of mortgages fixed for the It is likely to be only a matter of The global stock sell-off in January one to two year period (see Figure 9), time before IT security at one of marked the worst start to a year on which is likely driven not only by the our major banks is put to the test. record. fact that in most instances advertised The challenge therefore remains for fixed rates are now lower than floating Executives to ensure their IT security but also by the belief that rates have teams stay one step ahead. While any The global stock sell-off in January now reached their lowest point. breach is likely to result in significant marked the worst start to a year on Whether this belief turns out to be financial loss, the greatest damage record with the Shanghai Composite true, or whether many borrowers have may well be to the reputation of the Index entering bear-market territory locked into a fixed rate too soon, will institution involved. likely play out through 2016. in mid-January, having declined by over 20%. Conduct risk For Australia, our other major trading Every interaction between bank staff 9 SEE FIGURE 9 – PAGE 17 partner, the minerals and mining sector and the general public is a display has been hit hard by falling commodity of the internal culture, controls and prices, with the Australian economy operations of the bank. Executives • slowing and facing similar concerns There are still some major risks faced are therefore responsible for instilling by the economy in 2016, primarily with house price inflation posing risks the right culture and controls within coming from ongoing cash flow to financial stability. an organisation so that harm is not pressures in the dairy sector, Auckland At the December meeting, the US brought upon the customer through house price inflation, deteriorating Federal Reserve raised its target inappropriate employee actions or global market sentiment and volatility, range for the federal funds rate non-suitable products being sold. Like slowing global growth and persisting from 0% - 0.25% to 0.25% - 0.50% cyber risk, while any issue is likely deflationary pressures. for the first time since the GFC, to result in significant financial loss, quoting strengthening employment a greater loss might be the cost to data. However, in light of recent rectify or make good and the greatest There are still some major risks stock market events, the US damage may well be to the reputation faced by the economy in 2016. Federal Reserve was reported to be of the institution involved, which is closely monitoring global economic made all the more severe by the reach, developments and assessing the speed and untamed nature of social Some interesting trends have emerged potential impacts on the labour market media working alongside traditional with close correlation reported and inflation. outlets. between oil prices and equities. In the past, low oil prices were perceived to bring benefits and were seen as a form of tax cuts that increased discretionary income, encouraging consumers FIPS 2015 | KPMG | 21
Global economy Digital With the global economy again in Digital interaction is the way of the 21st limbo, the spectre of whether another century as consumers become more GFC will develop is increasingly tech savvy. Branches are evolving unclear, just as we had seemed to now cater for customers who are to be moving away from such an increasingly using digital services incident. Last year the focus was a and self-service capabilities. With potential meltdown in the European greater costs involved in continued Union (EU) and the resulting fallout, technology innovation, there will be compared to now when the worry is further opportunities to gain cost more around the continued slowdown efficiencies across the different of the Chinese economy and the business processes as branches get impact of depressed oil prices. For smaller and the front office gets more Executives, this creates a very automated. It will not be long until it challenging environment to try to is all done from your phone, phablet, assess where threats are likely to tablet or watch. come from, what form they will take and how to plan a response to them, Regulation given they are constantly changing. While regulation is required, the Executives do however know that speed at which it is pushed upon the it is not a matter of ‘if’ but a matter banks has come at a significant cost of ‘when’ another financial collapse and strain on resources. A knee-jerk will occur and the question is more reaction by regulators to global events about what its magnitude will be. could result in further regulation being While it is unlikely to originate here, imposed when it is not necessarily New Zealand, being part of the global required in New Zealand just yet. economy and society, will not escape its consequences. Summary
Disruptors Possibly, the sudden realisation and the greatest concern is that these Banks’ existing business models risks are no longer mutually exclusive, continue to be challenged by the in fact quite the opposite – they are threat posed by digital disruptors. so interrelated that you can no longer The threat they ultimately pose will assess the impact of any one risk in depend on whether the banks are able isolation. Now once you are afflicted to adapt fast enough to join them or by one of these risks, it can and will form strategic partnerships to share in likely morph into a cross match, with the rewards. several of the others being present or joining in the situation, making it all the more difficult to combat. 22 | KPMG | FIPS 2015
Registered banks – Timeline of events
strong profitability, sound asset quality ASB Bank discontinues its Facebook • Jan. 2015 and high likelihood of parent backing. payments app due to low usage and 13th ahead of Facebook’s announcement • 27th RBNZ receives ‘Central Bank of the • that a centralised app would soon Moody’s affirms Kiwibank’s credit Year’ award for 2015 from London- be added. based central banking publications rating of Aa3 stable. 20th (the Central Banking Journal and Fitch affirms TSB’s credit rating as A- • Westpac becomes Air New Zealand‘s CentralBanking.com). stable, despite TSB Bank writing off its airpoints partner. Westpac has signed remaining $53.9 million debt exposure 14th a 10-year deal with Air New Zealand, • to Solid Energy. Fitch Report says New Zealand banks offering airpoints with four MasterCard are among the most profitable banks credit cards and giving customers the in the developed world, and expects • Mar. 2015 ability to earn additional airpoints on them to maintain strong net interest 2nd their mortgages, effective 1 May 2015. margins. • Bank of China becomes the first • 24th • 15th Chinese bank to join the New Zealand RBNZ Deputy Governor Grant Fitch upgrades Kiwibank’s credit Bankers’ Association (NZBA). Spencer is appointed as chair of rating from AA stable to AA positive, 3rd the Organisation of Economic Co- a reflection of its backing by the • operation and Development (OECD) Standard & Poor’s (S&P) affirms TSB’s Government and the rating agency’s Committee on Financial Markets. credit rating of BBB+ stable. perceived “sound prospects for profitability” for New Zealand banks. • 4th RBNZ issues a formal warning to • Apr. 2015 28th • JPMorgan New Zealand Branch 20th RBNZ issues a formal statement • (JPMNZ) after finding reasonable Kiwibank issues $150 million of raising its concerns over widespread grounds to believe that risk perpetual capital notes with an S&P closures of accounts for money assessment requirements of the Anti- credit rating of BB-. remitters as a means of potential Money Laundering and Countering ‘de-risking’ by New Zealand banks to 24th Financing of Terrorism Act 2009 • comply with AML requirements. Kiwibank pays its first dividend of were not fully complied with for a $22 million, following pressure from • 29th period of approximately four months the Government as the state-owned RBNZ leaves the OCR unchanged during 2013. bank has been turning a profit for the at 3.50%. • 6th last 10 years and accumulating over Moody’s reaffirms New Zealand’s $500 million in capital. • Feb. 2015 sovereign debt credit rating of Aaa • 30th • 17th stable. RBNZ leaves the OCR unchanged FMA reaches a $2.97 million RBNZ drops the proposed ‘5-plus’ at 3.50%. settlement deal with Westpac over test for home loans, which would alleged mis-selling of interest rate require borrowers with five or more swaps to rural customers. These residential properties to be classed as • May. 2015 allegations have not been tested in commercial borrowers. • 3rd Court. S&P downgrades Rabobank’s credit • 12th rating from A+ to A. • 25th RBNZ leaves the OCR unchanged Fitch affirms credit ratings of the four at 3.50%. • 26th largest New Zealand banks; ANZ, Bank of India announces the opening ASB, BNZ, and Westpac as AA- stable, • 18th of its third New Zealand branch in noting conservative risk appetite, MasterCard becomes the first affiliate Hamilton. member of the NZBA. FIPS 2015 | KPMG | 23
• 28th High Court rules that ANZ has • Jul. 2015 • Sep. 2015 breached the Fair Trading Act in a case • 1st • 1st involving mis-selling of interest rate RBNZ Funding Agreement takes Applications open for Fonterra interest- swaps to rural customers. effect, providing five-year funding free loans intended to help struggling and prescribing how much of the dairy farmers amid low milk price Bank’s income may be used to fund payouts. Dairy farmers are eligible for • Jun. 2015 operating expenses. an interest-free loan of 50 cents per • 6th kilogram of share-backed milk solids Credit Contracts and Consumer • 15th produced from 1 June to 31 December Finance Amendment (CCCFA) Act Australian Prudential Regulation 2015. These loans will be interest-free 2014 and the Responsible Lending Authority (APRA) indicates that the until 31 May 2017, with applications Code come into effect. Australian banks would have to raise closing on 25 September 2015. A$30 billion to be positioned within • 10th the top 25 banks in the world, which • 2nd S&P lowers Deutsche Bank’s credit could have a flow on effect for their Former mortgage broker convicted rating to BBB+. New Zealand operations. of fraud, having forged documents 11th to facilitate sale of real estate to low • 23rd income families. Charges were laid RBNZ reduces the OCR by 25 bps • RBNZ reduces the OCR by 25 bps after BNZ launched an investigation to 3.25%. to 3.00%. into a fraudulent mortgage scheme in • 12th South Auckland in 2011. ASB and the Inland Revenue • Aug. 2015 10th Department (IRD) have settled a long • 4th RBNZ reduces the OCR by 25 bps running dispute involving $153 million • International dairy prices fall to a to 2.75%. plus interest and penalties that related 13-year low at the Global Dairy Trade to $499.4 million claimed in deductions auction, with the weighted average Fitch revises SBS Bank’s credit rating for foreign exchange losses incurred price across all products down to of BBB stable to BBB positive. during the GFC. US$1,815 per MT. • 15th • 22nd 7th Kiwibank announces its intention ASB agrees to pay $3.2 million in • Fonterra announces a reduction in the to reduce deposit requirements for a settlement with the Commerce 2015/16 farmgate milk price forecast owner occupied apartment lending Commission over alleged mis-selling of from $5.25 per kgMS to $3.85 per in the Auckland CBD area to as low interest rate swaps to rural customers kgMS, which is reportedly well below as 15%, with a minimum apartment between 2005–2009. breakeven point for most farmers. size of 40 sqm. This is compared to most other banks requiring 20% from • 25th 14th Fitch reaffirms Kiwibank’s credit rating • owner occupiers. S&P downgrades standalone credit of AA+. ratings by one notch for the four major ANZ seeks to raise $200 million 29th New Zealand banks and a number of through a five year unsecured • unsubordinated bonds offer with an Bank for International Settlements non-bank financial institutions, quoting issue credit rating of AA- from S&P. (BIS) names the big four Australian increased risks and exposures posed banks, CBA, ANZ, Westpac and NAB, by the Auckland property market. • 24th among the most profitable in the 28th Fonterra revises its 2015/2016 developed world when measured by • Moody’s revises ICBC NZ’s credit farmgate milk price forecast up return on assets. rating to A1, following the guarantee by $0.75, from $3.85 per kgMS to issued by its ‘parent’. $4.60 per kgMS. 24 | KPMG | FIPS 2015
• 11th • 10th • Oct. 2015 RBNZ Financial Stability Report is RBNZ reduces the OCR by 25 bps • 1st released, with the RBNZ pointing to 2.50%. New tax rules come into effect, to increased risks to stability of 15th with capital gains tax on residential New Zealand’s financial system. The • RBNZ releases results of stress properties imposed by the ‘bright RBNZ notes growing dairy exposures tests performed by the five largest line test’. for banks and asks the country’s top diary lenders. • 5th five dairy lenders to carry out stress Westpac retains the bulk of the tests of potential dairy losses. • 17th ‘all-of-Government’ banking services 23rd US Federal Reserve announces its • intention to raise its target interest rate contract after four years of negotiation, ASB and BNZ raise over $350 million range by 0.25% to 0.25% - 0.50%. with the contract having been put out and $550 million respectively, through to tender for the first time in 25 years. oversubscribed bond issuances, Five other banks were also given parts with $500 million being through of the eight-year contract. • Jan. 2016 oversubscriptions collectively. • 15th • 28th 26th BNZ’s Enterprise Risk Management RBNZ issues a formal warning against • High Court rules in BNZ’s favour, (ERM) model named “Initiative of the Kiwibank for non-compliance with finding that BNZ had not acted as Year” at Central Banking Publications’ the Anti-Money Laundering and a financial adviser when providing annual award. Countering Financing of Terrorism Act forecast analysis to support a between the period of 30 June 2013 to 20th farm property lending deal that • 30 June 2014. Statistics New Zealand reports 0.5% ultimately lead to losses incurred by deflation for the December 2015 the borrower. • 29th quarter and annual inflation of 0.1%, RBNZ leaves the OCR unchanged well below the policy target of 1 to 3% at 2.75%. • Dec. 2015 per year. • 30th 2nd 26th Deutsche Bank announces closure of • • Chief Executive Officer (CEO) Westland Milk Products, its New Zealand operations as part of Ben Russell leaves Rabobank to New Zealand’s second largest dairy co- the wider global initiative to cut costs join Heartland Bank as Head of op, reduces its forecast dairy payout and improve capital levels, resulting Rural Banking. to $4.15 to $4.45 per kgMS amid in about 26,000 job cuts and closure declining commodity prices. of operations across 10 countries • 3rd by 2018. ASB receives the New Zealand Bank • 27th of the Year award at the International Fitch Ratings revises the outlook Bank of the Year awards held in for the New Zealand economy from • Nov. 2015 London for its ‘Card Control’ function ‘positive’ to ‘stable’ and affirms its AA • 1st offered to customers. credit rating. RBNZ’s new LVR restrictions relating • 8th ANZ begins accepting China UnionPay to Auckland investment property come New Zealand formally joins the Asian into force. credit and debit cards at selected Infrastructure Investment Bank (AIIB), EFTPOS terminals. Implementation of • 6th with the view to enhance economic, the programme will be completed over Heartland Bank announces its trade and investment links with the the next 12 to 18 months. restructuring plans, involving Asian region. The AIIB is expected to amalgamation with its ‘parent’ commence operations in January 2016 • 28th effective 31 December 2015, issuing of with around $150 billion of initial capital RBNZ leaves the OCR unchanged $75 million in Tier 2 capital securities, to invest in infrastructure development at 2.50%. and returning up to $100 million to its in the region. shareholders. FIPS 2015 | KPMG | 25
Fonterra revises its forecast 2015/2016 farmgate milk price down by 45 cents to $4.15 per kgMS after prices at the Global Dairy Trade auctions declined again. • 29th Uber partners with ASB Bank, offering ASB card holders a 15% discount on Uber rides from 1 February to 31 July 2016. • Feb. 2016 • 1st Synlait Milk reduces its farmgate milk price forecast for the 2015/2016 season from $5.00 per kgMS to $4.20 per kgMS. • 2nd Paymark owners ANZ, ASB, BNZ and Westpac are reviewing their shareholding in the entity as an external party has indicated interest in purchasing the shares. • 11th Moody’s affirms New Zealand’s Aaa credit rating with a stable outlook. 26 | KPMG | FIPS 2015
Registered banks – Sector performance
The New Zealand banking MOVEMENT IN NET PROFIT sector continues to deliver 11 AFTER TAX strong results on the
back of lending growth, $MILLION margin growth and cost 7,000
control. Capital ratios have 6,000 been boosted. 5,000
4,000 The 2015 year has been generally positive for the 3,000 New Zealand banks, with 2,000 the sector achieving a further 1,000 6.94% increase in net profits 0 2014 NET NON- OPERATING IMPAIRED TAX 2015 to add to the 20.41% growth NET PROFIT INTEREST INTEREST EXPENSES ASSET EXPENSE NET PROFIT achieved last year (see Table 3 AFTER TAX INCOME INCOME EXPENSES AFTER TAX – page 27) and resulting in an all-time high overall net profit Profitability remain strong with New Zealand banks continuing to outperform their of $5.17 billion. 13 of the 21 survey participants Australian parents. improved their profitability, including four of the five largest banks that The following analysis of registered contributed $301 million to the overall banks is from the view of the top increase in net profits this year. geographic entity in New Zealand for each banking group, unless stipulated otherwise3. 11 SEE FIGURE 11 – PAGE 26 When looking at the main income statement categories, as shown in • Figure 11, the following can be seen: Non-interest income remained • Net interest income has improved strong, contributing an additional by an impressive 8.45% on the back $74.26 million to the bottom line for of strengthened interest margins the banking sector (see Figure 11), and up by 4 bps (see Table 4 – page 28) largely comprised of trading gains. and solid lending growth of 7.11% Returns on assets and equity eased (see Table 5 – page 30) contributing slightly this year, with RoA marginally $729.19 million. down from 1.17% to 1.16% and RoE • Non-interest income has increased reducing from 16.13% to 15.96% by 2.43%, on top of the 26.60% as earnings are spread over a increase achieved last year, growing asset and equity base (see contributing $74.26 million. Table 5 – page 30). However, returns FIPS 2015 | KPMG | 27
• Asset quality showed some €3.0–3.5 billion, two-thirds of which is strengthened its net interest margin weakening, with the impaired to be spent by 2016. and having reduced its operating costs. asset expense up by 65.33% or Of the other non-major banks Bank BNZ followed with a 22.12% $173.08 million on historically low of India, Citibank, The Co-operative improvement, increasing its bottom levels reported in the previous year. Bank, HSBC, JPMorgan, Bank of line by $188 million largely as a • Banks have contributed Tokyo and SBS Bank have all recorded result of an additional $185 million in $1.98 billion of tax to New Zealand, significant uplifts in profits (more than non-interest income and improved $161.42 million more than last year. 20%). HSBC has increased its profits cost efficiencies mitigating some Deustche Bank achieved the largest by $41.39 million, mainly as a result of deterioration in asset quality. BNZ was percentage increase in net profit, improved asset quality and stronger the only major bank to implement lifting its bottom line six-fold from net interest margin, which improved by NZ IFRS 9 and this may have had $4 million to $24 million, having 16 bps to 1.82%. some impact on provisioning. significantly improved its net interest Both SBS Bank and The Co-operative ANZ and CBA had another year of solid margin while also improving operating Bank look to differentiate themselves performance, having grown profits by a cost efficiencies, consistent with the from other banks to achieve growth further 3.51% and 3.08% respectively. parent’s global strategy to reduce by focusing on the fact that they are For ANZ the additional $94 million complexity and costs. Deutsche owned by members rather than a in non-interest income and better Bank’s cost cutting resulted in the group of shareholders, which seems operating cost control compensated announcement of the closure of its to have had some effect as both for a slightly weaker net interest New Zealand operations as part of managed to increase their profits by margin. For CBA, its strengthened net a global restructure that will see the just over 24%. interest margin mitigated impacts of German bank exit from 10 countries. weaker asset quality and lower non- Of the five major banks, Kiwibank The restructure is expected to globally interest income. save Deutsche Bank about €3.8 billion has achieved the highest percentage by 2018, with associated restructuring growth in net profit, up by 27.00% Westpac was the only major bank and severance costs of around to $127 million this year, having reporting a decrease in profitability.
TABLE 3: Registered Banks – Performance Trends Impaired Asset Operating Net Profit After Expense/ Increase in Increase in Net Expenses/ Year Tax/Average Interest Margin Average Gross Total Assets Profit After Tax Operating Total Assets Loans and Income Advances 2015 10.20% 6.94% 1.16% 2.28% 37.32% 0.12% 2014 5.28% 20.41% 1.17% 2.24% 39.44% 0.08% 2013 1.15% 8.53% 1.00% 2.26% 42.05% 0.16% 2012 0.78% 14.12% 0.93% 2.26% 44.40% 0.22% 2011 4.51% 10.04% 0.84% 2.23% 43.62% 0.30% 2010 -0.05% 7,389.22% 0.78% 2.09% 44.02% 0.42% 2009 5.03% -98.75% 0.08% 2.13% 43.66% 0.76% 2008 12.84% -2.26% 0.91% 2.07% 44.64% 0.24% 2007 16.10% 9.70% 1.08% 2.15% 43.30% 0.10% 2006 15.01% 6.79% 1.14% 2.28% 44.56% 0.06% 28 | KPMG | FIPS 2015
Net profit was marginally down survey period also contributed to an 12 of the 21 participants showed showing a 1.28% or $13 million improvement in interest income (see improvements in interest margins this decrease, attributable to an additional Figure 12 and Table 4 – page 28). year with the overall margin achieved $21 million in impaired asset charges. by the banking sector having more than recovered back to 2013 levels of TSB reported a marked percentage 2.26%. Figure 14 shows the banking decline in profits, down by 48.92% 12 SEE FIGURE 12 – PAGE 29 sector managed to maintain stable or $24.44 million, with an additional yields relative to fluctuating costs of $53.87 million Solid Energy impairment • charge being offset to some extent by stronger net interest margins. TABLE 4: Movement In Interest Margin 2015 2014 Movement Heartland Bank achieved 12.99% growth in net profit, attributable to % % (bps) a stronger net interest margin, up Australia and New Zealand Banking Group 2.26% 2.33% -7 by 30 bps to 4.89% and improved Limited – New Zealand Banking Group operating costs. Bank of Baroda (New Zealand) Limited 3.73% 3.84% -10 Overall the banking sector continues Bank of China (New Zealand) Limited n/a n/a n/a to be in a strong position, with Bank of India (New Zealand) Limited 4.21% 4.33% -12 another record profit year fuelled by Bank of New Zealand 2.30% 2.30% 0 strengthened interest margins on the back of lending growth, well managed China Construction Bank (New Zealand) Limited n/a n/a n/a operating costs, low cost funding Citibank, N.A. New Zealand Branch 1.93% 1.61% 32 and plenty of liquidity all contributing Commonwealth Bank of Australia New Zealand 2.30% 2.27% 4 to improved results (see Table 3 – Banking Group page 27 and Table 5 – page 30). This Deutsche Bank AG, New Zealand Group 1.66% -0.33% 199 is against the backdrop of a relatively Heartland Bank Limited 4.89% 4.59% 30 stable domestic economy as the Industrial and Commercial Bank of China growing demand for funding facilitates 0.82% 0.78% 4 lending growth and helps to alleviate (New Zealand) Limited JPMorgan Chase Bank, N.A. New Zealand some of the competitive pressures in 0.77% 1.15% -39 the lending market. Branch Kiwibank Limited 2.12% 1.87% 25 Net interest margin Kookmin Bank Auckland Branch 1.66% 1.93% -27 Net interest income has increased Rabobank Nederland New Zealand Banking 2.62% 2.74% -13 by $729.19 million or 8.45% which is Group reflective of the 7.11% growth in gross Southland Building Society 2.91% 2.51% 40 loans and advances (see Table 5 – The Bank of Tokyo-Mitsubishi UFJ Limited, 0.47% 0.39% 8 page 30), mainly driven by an increase Auckland Branch in property and agriculture lending (see The Co-operative Bank Limited 2.88% 2.76% 12 Figure 8). The Hongkong and Shanghai Banking 1.82% 1.65% 16 Corporation Limited, New Zealand Branch TSB Bank Limited 2.19% 2.00% 20 8 SEE FIGURE 8 – PAGE 17 Westpac Banking Corporation – New Zealand 2.29% 2.18% 11 Division • Sector Average 2.28% 2.24% 4 Strengthening interest margins, up from 2.24% to 2.28% over the n/a = not available FIPS 2015 | KPMG | 29
% REGISTERED BANKS: 3.00 12 INTEREST MARGINS
2.50
2.00
1.50
1.00
NEW ZEALAND INCORPORATED BANKS 0.50 BRANCH BANKS 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
% TERM DEPOSIT RATE SPREADS 2.5 13 (6 MONTHS) 2.0
1.5
1.0
0.5
0.0
OVER OVERNIGHT INTERBANK CASH RATE -0.5 OVER 90 DAY BANK BILL YIELD -1.0 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
% % MAJOR BANKS: YIELD VS 6.50 2.75 14 COST OF FUNDING 6.00 2.50
5.50 2.25
5.00 2.00
4.50 1.75
YIELD (OR RETURN ON INTEREST EARNING 4.00 1.50 ASSETS) (LHS)
COST OF FUNDS (LHS) 3.50 1.25 SPREAD (RHS) 3.00 1.00 2010 2011 2012 2013 2014 2015 30 | KPMG | FIPS 2015
funds, keeping spreads within a tight Bank margins on new customer For a number of participants the year 12 bps range between 1.77%–1.89% mortgage lending peaked in January end reporting dates have not yet for the past four years. 2015, with margins over one and captured the OCR cuts and reflect the two-year swap rates improving to OCR rises imposed by the RBNZ in the 2.84% and 2.52% respectively. During first half of 2015, resulting in increased 14 SEE FIGURE 14 – PAGE 29 the period of June 2014 to January interest income and expenses for 2015 swap rates for both tenors the survey period. Overall interest began to gradually shift downwards expense rose a further $1.47 billion • due to changes in market sentiment, this year, after having increased by This is an impressive result given the forecasting potential OCR cuts. $567.77 million in the previous year. All low interest rate environment and Two-year swap rates decreased at a of the five major banks reported higher competitive asset pricing across both greater rate resulting in a wider margin funding costs, with interest expense the domestic and commercial lending observed for the two‑year average rising relative to average interest books which continues to challenge mortgage rate. bearing liabilities, with the highest survey participants. Per Figure 17 it basis point increase of 35 bps reported Subsequently, as the OCR cuts in the can be seen that the banks managed by CBA, followed closely by Kiwibank second half of 2015 began to be priced to improve interest margins, while still with 34 bps, while BNZ, ANZ and into mortgage rates, margins returned achieving strong asset growth this Westpac each reported increases of survey period, after having maintained to levels broadly similar to those observed in early 2014 (see Figure 16). 16-17 bps. The big five incurred broadly margins at stable levels for the past similar funding costs at circa 4%, with five years. the exception of BNZ at 3.79% and Westpac at 3.93% (see Figure 15). 16 SEE FIGURE 16 – PAGE 33 •17 SEE FIGURE 17 – PAGE 33 • TABLE 5: Registered Banks – New Zealand New Zealand All Banks Analysis of Performance of Banks Incorporated Banks Branch Banks 2015 2014 2015 2014 2015 2014 Increase in Total Tangible Assets 10.91% 5.71% -45.74% 2.48% 10.20% 5.28% Increase in Operating Income 9.35% 8.64% -45.40% -8.75% 8.56% 7.31% Increase in Net Profit After Tax 6.75% 22.88% -36.83% -16.70% 6.94% 20.41% Increase in Gross Loans and Advances 7.91% 5.12% -43.62% 1.78% 7.11% 4.85% Net Profit After Tax/Average Total Tangible Assets 1.21% 1.22% 0.47% 0.58% 1.16% 1.17% Net Profit After Tax/Average Equity 14.51% 14.27% 8.63% 9.85% 15.96% 16.13% Net Interest Income/Average Total Tangible Assets 2.23% 2.24% 0.72% 0.85% 2.10% 2.09% Non-interest Income/Average Total Tangible Assets 0.70% 0.66% 0.24% 0.53% 0.70% 0.69% Operating Expenses/Average Total Tangible Assets 1.10% 1.15% 0.30% 0.39% 1.05% 1.11% Operating Expenses/Operating Income 37.58% 39.83% 30.83% 27.83% 37.32% 39.44% Impaired Asset Expense/Average Gross Loans and Advances 0.12% 0.06% 0.08% 0.52% 0.12% 0.08% Collective Provision/Net Loans and Advances 0.41% 0.40% 0.12% 0.20% 0.39% 0.39% Total Provision For Doubtful Debts/Gross Loans and Advances 0.55% 0.60% 0.87% 0.67% 0.56% 0.61% FIPS 2015 | KPMG | 31
Heartland continues to lead the Positive trends around interest banking sector with an interest margin margins could continue through 2016 if 15 SEE FIGURE 15 – PAGE 33 of 4.89%, a further 30 bps increase the current economic climate prevails on last year. Heartland has established and banks continue to enjoy reduced • itself as a specialist financial services funding costs. This is helped by OCR During the survey period the banking group not aiming to compete with cuts in the latter half of 2015 and a sector has improved interest income mainstream banks, and has become further easing outlook for 2016 shared generated over average interest one of the first banks globally to by most market commentators, earning assets by 19 bps, from 5.52% provide a funding line through the P2P persistently low global yields, and the to 5.71%. When this is considered in online lending platform Harmoney. borrowers’ continued preference for conjunction with the 20 bps increase fixed rate loans. One dark cloud on According to the RBNZ, the proportion in interest expenses relative to average the horizon remains; the uncertainty of fixed rate residential mortgage interest bearing liabilities, up from in global markets and the potential loans has increased by 367 bps over impacts of this on spreads. 3.67% to 3.87%, the resulting impact a 12 month period to 75.56% by on net interest margin was still a November 2015. The proportion of positive one (see Figure 14). fixed rate loans overtook floating loans Return on assets/Return on during the first half of 2013 and have equity steadily risen since then (see Figure 6). Both RoE and RoA eased slightly 14 SEE FIGURE 14 – PAGE 29 following strong improvements achieved in the previous survey period. 6 SEE FIGURE 6 – PAGE 15 RoE was down by 17 bps to 15.96%, •Notably, four of the big five banks while RoA remained consistent at maintained a net interest margin of 1.16%, down by only 1 bp from 1.17% circa 2.30%, with ANZ at 2.26%, BNZ • last year (see Table 5 – page 30). Term deposit rates followed OCR at 2.30%, CBA at 2.30%, and Westpac Since 2009, RoE and RoA have trends downward (see Figure 13), at 2.29%, while Kiwibank was not steadily recovered to close to pre with the banking sector enjoying far behind at 2.12% (see Table 4 – GFC levels, which were 16.68% and plenty of liquidity in the market page 28). 1.08% respectively in 2007. However, both domestically and overseas, the banks still have a little way to go Notable gains in net interest margins as domestic rates continue to before they are able to reach returns were reported by SBS and Citibank, attract strong overseas interest in a of 17.12% and 1.39% that were up by 40 bps and 32 bps, respectively. globally low yield environment. With achieved in 2005. Certainly, returns For both banks, this was attributable to prevailing competitive pressures to to shareholders will continue to be stronger interest income yields over keep lending rates down and reduce challenged in the years ahead with average interest earning assets. Of funding costs, borrowers continue to the increased regulatory requirements the five major banks, Kiwibank proved benefit more than savers in this low for residential mortgages requiring to be a clear outperformer, improving interest rate environment. According banks to hold higher levels of capital its net interest margin by 25 bps to RBNZ statistics, 6 month term for residential property loans from to 2.12%. deposit rates have declined by 83 bps 1 November 2015. over a 12 month period to 3.36% by The more notable easing in net November 2015 (see Figure 3). This Heartland continues to lead the way, interest margins was shown by closely mirrors the 75 bps cut in OCR generating the highest RoA of 1.59%, JPMorgan and Kookmin, down by rates over the same period. while Bank of Baroda lost its top 39 bps and 27 bps, respectively. position of 1.90%, having experienced JPMorgan’s margin was negatively a 78 bps decline this year. The four impacted by higher funding costs big banks have generated similar and reduced interest income, while 13 SEE FIGURE 13 – PAGE 29 RoA levels, ranging between 1.14%– for Kookmin funding costs were the 1.25% and continue to outperform main driver. • their respective Australian parents. 32 | KPMG | FIPS 2015
Performance continues to be fuelled owned bank has been turning a profit BNZ and ANZ reported the by strong profitability generated from a for the last 10 years and accumulating largest increases in non-interest growing asset base. over $500 million in capital. income at $185 million and $94 million, respectively. For BNZ RoEs generated by the main banks Looking ahead we would expect the $185 million uplift was largely remain strong compared to their further challenges to maintaining attributable to a $73 million increase Australian parents, with only CBA these levels of returns due to margin New Zealand being lower than CBA pressures coming from competition, in trading income and $151 million in Australia. Westpac remained ahead higher capital requirements and global favourable revaluations of financial at 17.21% despite a 258 bps decline market volatility. assets and liabilities, offset by a on 19.79% reported last year. BNZ $57 million reduction in other fees and Kiwibank improved their RoEs by Non-interest income and commissions. ANZ benefitted 136 bps and 173 bps, respectively, from favourable trading activity Overall the New Zealand banks while ANZ lost a bit of momentum and foreign exchange translation, continue to yield positive non-interest with RoE easing by 35 bps. reporting a $52 million increase in net income results, showing an increase trading income comprising mostly Notably, BNZ outperformed its of $74.26 million (see Figure 11). of a $44 million increase in foreign Australian parent with the greatest bps exchange gains. ANZ has had a gap on both measures, reporting successful year focusing on other lines RoA of 1.25% and RoE of 16.24%, 11 SEE FIGURE 11 – PAGE 26 of business, achieving a $60 million compared to RoA of 0.76% and RoE of increase in funds management and 11.49% generated by its parent. • insurance income. There was some reduction in the This increase was mainly a combination The more notable decreases in non- level of cash dividends paid by the of a $253.26 million increase in interest income were reported by five major banks this year, down by other income, offset by a decrease Rabobank, CBA and Deutsche Bank, $83 million or 2.42% from $3.44 billion of $179 million in abnormal income showing declines of $62.83 million, in 2014 to $3.35 billion in 2015. pertaining to one-off income items $28 million and $20 million, Substantial dividend payouts have reported last year. Financial markets respectively. For Rabobank, the been reflective of continued strong performance has been mixed across decrease was largely attributable to a profitability in the banking sector. the survey participants with some large $56.23 million unfavourable fair value Kiwibank paid its first dividend of trading gains and losses reported for movement on trading derivatives. For $22 million this year following pressure trading derivatives and securities, as CBA, the $28 million decrease was from the government, as the state- well as foreign exchange revaluations. mostly attributable to the $26 million unfavourable fair value movement on derivatives deemed as the ineffective TABLE 6: Major Banks – Personnel Cost portion of cash flow hedges. And 2015 2014 for Deutsche Bank, the $20 million decrease in non-interest income Cost/ Cost/ Personnel Personnel was driven by $28 million in foreign Entity Employee Average Employee Average Cost Cost exchange losses mitigated to some Numbers Employees Numbers Employees $Million $Million extent by a $12 million increase in net $000's $000's trading income. ANZ 8,104 874 107.0 8,225 845 102.4 BNZ 4,841 449 93.4 4,769 454 95.5 Operating expense ratio Cost efficiencies continue to improve CBA + ASB 4,469 487 108.3 4,521 473 102.4 as banks continue to focus on cost Kiwibank 1,188 123 104.5 1,166 117 99.4 control and improve the efficiency of Westpac 4,497 468 104.4 4,469 447 98.4 their processes. Operating expenses FIPS 2015 | KPMG | 33
% MAJOR BANKS: COST OF 4.8 15 FUNDS 4.6
4.4
4.2
4.0
3.8 ANZ BNZ 3.6 CBA + ASB 3.4 KIWIBANK WESTPAC 3.2 3.0 2011 2012 2013 2014 2015
% MOVEMENT IN RESIDENTIAL 3.0 16 MORTGAGE MARGINS OVER SWAP RATES 2.8
2.6
2.4
2.2
BANK MARGIN OVER ONE-YEAR SWAPS 2.0 BANK MARGIN OVER TWO-YEAR SWAPS 1.8 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS, BLOOMBERG FEB 14 MAY 14 AUG 14 NOV 14 FEB 15 MAY 15 AUG 15 NOV 15
$MILLIONS % REGISTERED BANKS: TOTAL 500,000 2.60 17 ASSETS VS INTEREST MARGIN 450,000 2.50
400,000 2.40
350,000 2.30
300,000 2.20
250,000 2.10
200,000 2.00 INTEREST MARGIN (RHS) 150,000 1.90 TOTAL ASSETS (LHS) 100,000 1.80 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 34 | KPMG | FIPS 2015
relative to operating income decreased increase in operating expenses. Staff more normalised credit performance. further from 39.44% to 37.32% (see costs incurred by the five major banks The overall impaired asset expense Figure 25) as the banking sector remained within a tight range at circa for the banking sector has increased achieved an 8.56% increase in 11% relative to revenues. CBA and relative to both revenues and gross operating income, while operating ANZ were still at the higher end, with loans, up by 62 bps to 1.87%, and up expenses increased by only 2.72%. an average cost per employee at by 4 bps to 0.12%, respectively (see Improvements in operating expense $108,300 and $107,000 respectively Figure 18 and Table 5 – page 30). levels were achieved by all major (see Table 6 – page 32). banks, with the exception of CBA Operational cost efficiency will continue keeping its ratio at 36.56%, up slightly to be at the forefront of focus for the 18 SEE FIGURE 18 – PAGE 35 from 36.54%. BNZ achieved the banks. However, with an industry lowest operating costs ratio among that continues to evolve, the banks the five major banks, down by 462 bps • continue to invest in technology and to 33.72% this year, having increased Notably, all of the five major banks innovation to digitise their processes its operating income by 13.86% experienced these increases to especially at the front office to meet while keeping its cost base largely varying degrees. customer needs and also to stay ahead unchanged. Westpac followed with the of the game when potential disruptors BNZ who was the only major bank next lowest operating expense ratio threaten to enter the banks’ traditional to early adopt the new NZ IFRS 9 among the major banks at 35.77%, markets. Regulatory changes continue reported the highest impaired asset achieving a 139 bps reduction. to put pressure on compliance costs expense ratio among major banks at as banks need to spend on risk and 0.19% of average gross loans, closely compliance programmes to meet followed by CBA at 0.15%, with ANZ, 25 SEE FIGURE 25 – PAGE 39 new regulatory obligations such as the Westpac and Kiwibank in the lower new LVR speed limits and outsourcing range of 0.7%–0.9%. • reviews announced later in 2015. The increase in impaired asset Among the major banks, Kiwibank The Executives interviewed have expense was mainly attributable to achieved the largest bps reduction, reported heightened awareness around fewer write-backs this year. There albeit from a higher cost base with the managing conduct risk, the importance was also some reduction in specific ratio reducing by 569 bps to 55.81%. of digital transformation and ensuring provisioning relative to gross loans, Kiwibank continues to incur greater data security, which could put further down from 0.22% to 0.16%, with 11 levels of operating expenditure as pressure on operating costs in the of 21 entities reporting lower specific it undergoes an upgrade to its core near future. Continued investment in provisions. Meanwhile, levels of banking system that was estimated to technology and digital channels will collective provisioning moved in line cost over $100 million and run for up to remain critical for the banks in order to with new lending growth, remaining five years. Citibank achieved the largest remain competitive and protect their at 0.39% of gross loans (see Table 5 – customer base. dollar value reduction in operating page 30). expenses, down by $7.43 million or For ANZ, the $85 million increase 32.10%, while its operating income Impaired assets in asset impairment charges was grew by 3.87%. The banking sector has experienced mainly due to a $92 million write-back some softening in asset quality during Personnel costs continued on an in collective provisioning last year this survey period with the impaired upward trend, with the banking sector compared to a $3 million charge this asset expense up by $173.08 million having paid $2.63 billion to employees, year. CBA reported a similar story or 65.33%. As mentioned in our last up from $2.54 billion in the previous with an unfavourable movement survey, the reduction in impaired year. The additional $81.12 million in impaired asset expense mostly assets seen in recent years has in personnel costs contributed to arising due to a $13 million increase in reached the bottom of the credit cycle 65.77% of the overall $123.35 million collective provisioning. and current year’s charges reflect a FIPS 2015 | KPMG | 35
% REGISTERED BANKS: 1.20 18 IMPAIRED ASSET EXPENSE TO LOANS AND ADVANCES 1.00
0.80
0.60
TOTAL PROVISION FOR DOUBTFUL DEBT/ GROSS LOANS AND ADVANCES 0.40 IMPAIRED ASSET EXPENSE/ AVERAGE LOANS AND ADVANCES 0.20 NET LOAN WRITE OFFS/AVERAGE LOANS AND ADVANCES 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
$MILLIONS % REGISTERED BANKS: 7,000 280 19 GROSS IMPAIRED AND PAST DUE ASSETS 6,000 240
5,000 200
4,000 160
PAST DUE ASSETS (LHS) 3,000 120 GROSS IMPAIRED ASSETS (LHS) 2,000 80 SPECIFIC PROVISION/GROSS IMPAIRED AND PAST DUE ASSETS (RHS) 1,000 TOTAL PROVISION/GROSS IMPAIRED AND 40 PAST DUE ASSETS (RHS) 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
$MILLION REGISTERED BANKS: 390,000 20 TOTAL LOANS AND ADVANCES 380,000 370,000
360,000 350,000 340,000 330,000 320,000
310,000
TOTAL LOANS AND ADVANCES 300,000 290,000 2010 2011 2012 2013 2014 2015 36 | KPMG | FIPS 2015
BNZ recorded a $52 million 2015/16 season to just $4.15 per kgMS, price inflation in Auckland remains a collective provision charge, offset by the dairy sector will continue to be financial stability risk suggesting that it a $28 million reduction in specific under extreme pressure. will continue to monitor developments provisioning mostly reflecting write- in house prices and introduce further offs during the year. Meanwhile, lending restrictions if house inflation TSB’s current year impaired asset 21 SEE FIGURE 21 – PAGE 37 persists and extends to other regions. expense was negatively impacted by The banking sector achieved a marked a further $53.87 million Solid Energy reduction in gross impaired assets, impairment charge. Bank of Tokyo • In June 2015 the country’s biggest down by $495.17 million or 21.97% also had significant exposures to Solid dairy lender, ANZ, reported having (see Figure 19), led by ANZ having Energy, recording a $29.56 million reduced its dairy exposures by reduced its gross impaired assets by impairment charge this year, in approximately 16% or $11.3 billion $264 million while also growing its addition to a $50.44 million charge the since 2010, having estimated that 5% lending book. previous year. of its dairy book would be stressed in HSBC and Rabobank bucked the trend the upcoming 12 months. and showed significant improvements In November the RBNZ reported 19 SEE FIGURE 19 – PAGE 35 in asset quality, releasing that although non-performing dairy $14.47 million and $14.41 million in loans were still low at 1%, up from specific provisions, respectively. • 0.6% the previous year, the watchlist Reductions were also achieved by the According to RBNZ statistics, loans increased to 5.8% and were other major banks, with the exception agriculture and mortgage lending considered a leading indicator of non- of CBA which reported a $116 million contributed to 62.33% of the total performing loans. increase in gross impaired assets $48.58 billion in lending growth for the this year. Mortgage exposures continue to 2015 year. dominate the banks’ loan books, The potential risks to asset quality forming 51.75% or $208.76 billion mainly arising from dairy, property and of total banking sector lending (see global uncertainties are mitigated to 8 SEE FIGURE 8 – PAGE 17 Figure 4). This lending continues to an extent by the relative stability in the be supported by a buoyant property local economy with reported strong • market, with the recently implemented employment, tourism, consumer and In June 2015, dairy loans totalled LVR speed limits perceived by the business confidence. $37.87 billion and comprised 66.72% Executives as strengthening the credit of all agricultural lending by the banks. quality of new lending. December Analysis of lending Amid dairy payouts remaining below property data released by REINZ Lending has continued to grow at a breakeven point, and the RBNZ and showed some signs of slowing, with steady pace for the past five years Dairy NZ estimating 80% of dairy December median prices stagnant and (see Figure 20), with banking sector farmers to have negative cash flow in sales volumes falling. the 2015/16 dairy season, the banks lending rising by 7.11% this year, up on are keeping a close eye on these the 4.85% growth the year before (see exposures. In September 2015 Fonterra Table 5 – page 30). moved to provide some financial relief 4 SEE FIGURE 4 – PAGE 11 to struggling dairy farmers, offering interest-free loans at 50 cents per • 20 SEE FIGURE 20 – PAGE 35 kilogram of share-backed milk solids However, the outlook for property in produced from 1 June to 31 December 2016 is expected to remain unclear for 2015. Fonterra estimated that this a few more months as the December • will cost them $390 million. With the month is typically a low season for real recent cut of Fonterra’s payout for the estate. The RBNZ has said that house FIPS 2015 | KPMG | 37
$MILLIONS % DAIRY EXPOSURES 60,000 67 21
50,000 65
40,000 63
30,000 61
20,000 59 TOTAL LOANS – DAIRY (LHS) TOTAL LOANS – AGRICULTURE (LHS) 10,000 57 DAIRY LENDING AS A PERCENTAGE OF TOTAL AGRICULTURAL (RHS) 0 55 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS 2008 2009 2010 2011 2012 2013 2014 2015
$MILLION REGISTERED BANKS: 350,000 22 SOURCES OF FUNDING 300,000
250,000
TOTAL FUNDING 200,000 NZD TERM DEPOSITS NZD FUNDING (INCL NEG/REG INSTRUMENTS, 150,000 BONDS, REPOS, DEPOSITS AND OTHER) FX FUNDING (INCL NEG/REG INSTRUMENTS, 100,000 BONDS, REPOS, DEPOSITS AND OTHER)
FUNDING FROM ASSOCIATES 50,000 LOCAL AUTHORITY FUNDING 0 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS SEP 09 SEP 10 SEP 11 SEP 12 SEP 13 SEP 14 SEP 15
% INCREASE IN NEW ZEALAND 15 23 LENDING (YEAR ON YEAR GROWTH) 10
5
0 LENDING – AGRICULTURE (YEAR ON YEAR GROWTH) LENDING – BUSINESS (YEAR ON YEAR GROWTH) -5 LENDING – TOTAL HOUSEHOLD (YEAR ON YEAR GROWTH) -10 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS NOV 10 NOV 11 NOV 12 NOV 13 NOV 14 NOV 15 38 | KPMG | FIPS 2015
Total gross loans and advances at 8.32%, closely followed by CBA at Executives surveyed viewed the new increased from $341.76 billion to 8.26%, Westpac at 6.91%, Kiwibank introduced LVR restrictions on investor $366.05 billion in 2015. at 6.55% and BNZ at 5.93%. lending positively, commenting that these should help enhance the credit ANZ continues to enjoy the largest quality of loan books. market share at 31.42%, measured 23 SEE FIGURE 23 – PAGE 37 by gross loans and advances, having gained an additional 0.35% market Analysis of funding share this year. BNZ appears to have New Zealand banks were able to • enjoy a good supply of funds during As seen in Figure 23 growth rates in lost 0.21% market share down to agriculture lending outpaced growth 18.76% this year, while CBA gained 2015, with total funding increasing rates in lending to all other sectors 0.20% to reach 18.94%. Meanwhile, by 5.26% to $298.56 billion for the by the end of 2015, with a lot of Westpac and Kiwibank maintained banking sector by November 2015 (see the growth coming from dairy (see their market share at broadly Figure 22). Figure 21). An RBNZ report indicated consistent levels with 19.12% and that only a small proportion of this 4.28%, respectively. related to new dairy lending, with the Amongst the four major banks, home 22 SEE FIGURE 22 – PAGE 37 majority being working capital debt lending continues to increase driven loans to existing customers. by the continued momentum in the • property market and was the biggest Increased volatility in global financial driver of loan growth with an additional markets poses risks to New Zealand’s 21 SEE FIGURE 21 – PAGE 37 $11.22 billion in lending, followed by financial system due to continued $9.85 billion in corporate and other reliance on offshore funding by non-housing term loans. As can be New Zealand banks. RBNZ data • released in November 2015 shows Overall, only five banks experienced seen in Figure 24 the banks continued a reduction in their loan books with to grow their business lending books positive trends, with banks continuing the most notable declines reported at a steady pace of approximately 6% to move away from offshore funding by Citibank, Kookmin and Bank per annum. and more towards local term deposits of Tokyo at 13.69%, 36.42% and to mitigate these risks (see Figure 22). 10.78%, respectively. Further, the Core Funding Ratio 24 SEE FIGURE 24 – PAGE 39 (CFR) introduced by the RBNZ as Citibank’s loan books declined by a measure of reliance on offshore $90.81 million, mostly attributable to funding and designed to ensure run-off of existing corporate loans • that New Zealand banks are better with limited new lending. Bank of Deutsche Bank and Bank of India positioned to withstand any major Tokyo’s loan book declined by over achieved the most notable growth shocks in global financial markets, $324.87 million, comprising of in loan books, up by 48.37% and has strengthened this year up from corporate loans. Kookmin reported a 28.07%, respectively; however, 85.50% to 87.06%, and is well above $71.92 million reduction, representing both of these were from relatively the regulator minimum CFR of 75%. a reduction in residential and small bases. This is consistent with an increase corporate loans of $31.29 million and LVR restrictions imposed by the RBNZ in customer deposit growth over $40.70 million, respectively. continue to have a positive impact on the survey period to 8.53%, up from The five major banks accounted for the quality of housing loans, with the 6.84% the year before. 96.57% of total new lending this year, big five banks reporting reductions in Despite OCR cuts by the RBNZ during contributing $23.45 billion of the total higher LVR loans. Loans with LVRs < the second part of 2015 with the OCR $24.29 billion increase for the banking 80% have increased from 84.28% to now down from 3.50% to 2.50% (see sector, with ANZ achieving the highest 86.83%. Loans with LVRs > 80% have Figure 5), New Zealand continues to growth rates amongst the major banks decreased from 15.72% to 13.17%. have some of the highest interest FIPS 2015 | KPMG | 39
% INCREASE IN REGISTERED 15 24 BANK AND NON-BANK BUSINESS LENDING 10
5
0
-5
-10
-15 REGISTERED BANK BUSINESS LENDING -20 NON-BANK BUSINESS LENDING -25 SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS NOV 10 NOV 11 NOV 12 NOV 13 NOV 14 NOV 15
$MILLIONS % OPERATING EXPENSES VS 4,900 60 25 OPERATING EXPENSES/ OPERATING INCOME 4,700 55
4,500 50
4,300 45
4,100 40
3,900 35 OPERATING EXPENSES/ OPERATING INCOME (RHS) 3,700 30 OPERATING EXPENSES (LHS) 3,500 25 2011 2012 2013 2014 2015
% % MAJOR BANKS: PAST DUE 1.8 180 26 AND GROSS IMPAIRED ASSETS VS GROSS LOANS AND ADVANCES 1.5 150
1.2 120
0.9 90
GROSS IMPAIRED/GROSS LOANS AND 0.6 60 ADVANCES (LHS) PAST DUE/GROSS LOANS AND ADVANCES (LHS) 0.3 30 TOTAL PROVISIONS/PAST DUE AND GROSS IMPAIRED ASSETS (RHS) 0.0 0
30 SEP 13
30 SEP 13
30 SEP 13
30 SEP 13
30 SEP 13
30 SEP 15
30 SEP 15
30 SEP 15
30 SEP 15
30 SEP 15
30 SEP 14
30 SEP 14
30 SEP 14
30 SEP 14
30 SEP 14
31 MAR 15
31 MAR 15
31 MAR 15
31 MAR 15
31 MAR 15
31 MAR 14
31 MAR 14
31 MAR 14
31 MAR 14
31 MAR 14 ANZ BNZ CBA + ASB KIWIBANKWESTPAC 40 | KPMG | FIPS 2015
rates among developed countries and yield, with a range of funding types ANZ, BNZ and Rabobank showed continues to be appealing to offshore and range of rates, products and marked improvements in their Tier 1 investors chasing higher yields, thus tenors on offer. Following considerable Capital ratios, increasing by 160 bps, providing a steady pipeline of overseas declines in commodity and equity 105 bps and 97 bps respectively. funding. However, as New Zealand prices in January 2016, global financial For these banks, the growth in risk faces deflationary pressures, with markets have become more volatile, weighted exposures arising from inflation in negative territory in the last starting to impact availability of growing loan books was mitigated quarter, many economists are pointing funds. Impacts of this, if current by increased capital in the form of to the possibility of further OCR cuts. developments continue, will not be earnings retained and issuance of new seen until next year’s survey. subordinated debt. Among the major banks, only ASB 5 SEE FIGURE 5 – PAGE 15 Capital adequacy remains and Westpac reported declines in strong their Tier 1 Capital ratios, down by • For the first time since the inception 90 bps to 10.80% and down by Most banks reported an increase in of Basel III in 2013, registered banks 80 bps to 11.10%, respectively. As funding costs over the survey period have reversed the declining trends for Total Capital ratios, ASB saw a with interest expense over average in their capital adequacy ratios. They decline of 90 bps, however, Westpac interest bearing liabilities for the have since built their capital up to all- managed to increase their Total Capital banking sector increasing from 3.67% time highs post the GFC. The average ratio by 150 bps. The primary driver to 3.87% and likely to be reflective capital adequacy ratio for locally behind the decrease in Tier 1 Capital of the OCR hikes that were in effect incorporated banks in New Zealand ratios was the growth in gross loans earlier in the 2015 year which is improved by 72 bps from 12.44% of $4.75 billion and $4.55 billion, reflected in Figure 15. to 13.16%, while the Tier 1 Capital respectively, which resulted in adequacy ratio increased by 48 bps increased risk weighted exposures for from 11.38% to 11.86% which reflects both banks. Westpac was however the banks’ continued focus on meeting able to increase its Tier 2 Capital 15 SEE FIGURE 15 – PAGE 33 capital requirements as well as through the issuance of $1.14 billion protecting themselves against future in subordinated debt, which resulted • financial shocks. On top of the RBNZ in its Total Capital ratio increasing However, global market liquidity has minimum capital ratios of 8% and 6% to 13.40%. declined in early 2016 affecting the for Total Capital and Tier 1 capital, all of Strengthened capital adequacy in the availability of funds. Up until the end the banks were able to cover the 2.5% New Zealand banking sector provides of 2015 Executives commented that common equity buffer requirement. there was plenty of liquidity chasing much welcomed news amid concerns around dairy exposures, slowing growth in China and uncertainties in TABLE 7: Major Banks – Funds Management Activities global financial markets, and provides greater assurance of the banks’ ability 2015 2014–2015 2014 Entity to withstand any significant downturn $Million Movement % $Million in the financial markets. ANZ 22,740 14.1% 19,923 Funds Under Management BNZ 3,900 17.0% 3,334 (FUM) CBA + ASB 7,523 24.3% 6,050 The registered banks reported strong Kiwibank 3,735 -3.9% 3,885 growth in Funds Under Management Westpac 9,448 19.2% 7,924 (FUM) during the survey period, with the five major banks reporting Total 47,346 15.2% 41,116 an increase of $6.23 billion or FIPS 2015 | KPMG | 41
15.15% growth with total FUM behalf of customers increasing by $44 million or 28.03%, while for reaching $47.35 billion (see Table 7 – another $715 million. BNZ the increase was $30 million or page 40). Among the big five banks, 40.00%. BNZ reported the highest Since its inception in 2007, the Kiwibank was the only one reporting dollar value increase in trading income KiwiSaver scheme continues to play a contraction in FUM, down by at $43 million, while Westpac recorded a pivotal role in fuelling FUM growth 3.86% or $150 million. Meanwhile a decrease of $15 million or 51.72% for and will continue to do so as more all of the other major banks reported the year. people opt into the scheme. Fund double-digit growth, with CBA and management fees continue to present The sharp decline in swap curves that Westpac FUM increasing by 24.35% opportunities for banks to expand occurred in January 2016 will likely and 19.23%, respectively. Westpac their revenue base and diversify their trigger further revaluation gains or recorded this growth on the back of revenue streams. losses in early 2016. Meanwhile, after a $680 million increase in retirement having reached their lowest levels plan funds, along with its retail unit since the GFC, credit spreads have trusts growing by $240 million. Treasury and trading income Foreign exchange and trading begun to creep up and are expected With $22.74 billion in FUM, ANZ income were the main drivers behind to continue widening in the upcoming continues to be the largest market movements in non-interest income 2016 year which could push up term player in this space and leads the for the major banks this year. Volatility lending margins. sector in growth with a $2.82 billion in both interest rates and foreign increase in FUM. This alone accounts exchange rates led to larger revaluation for 45.22% of total growth and is movements for trading derivatives almost equivalent to that of CBA and recorded in the income statements Westpac combined. For ANZ much of (see Table 8 – page 41 for positions at this growth was driven by an increase year end) in its KiwiSaver and other managed funds increasing from $7.21 billion Notably, ANZ’s foreign exchange to $9.15 billion, along with their trading income increased by investment portfolios managed on
TABLE 8: Registered Banks – Derivative Contracts Interest Rate Contracts Exchange Rate Contracts Entity Year Forwards Swaps Futures Options Total Forwards Swaps Options Total 2015 24,633 1,130,414 45,407 2,045 1,202,499 75,930 130,093 3,690 209,713 ANZ 2014 8,899 680,503 17,930 2,447 709,779 63,800 155,303 4,909 224,012 2015 3,560 442,045 242,715 183 688,503 81,395 47,818 6,456 135,669 BNZ 2014 3,308 339,406 132,593 134 475,441 69,646 47,632 4,132 121,410 2015 14,477 33,574 1,250 82 49,383 7,365 2,713 315 10,393 CBA + ASB 2014 3,007 27,500 93 148 30,748 4,312 2,983 134 7,429 2015 1,800 37,506 1,075 0 40,381 978 36 37 1,051 Kiwibank 2014 550 25,080 1,010 0 26,640 1,153 303 112 1,569 2015 8,821 350,798 112 215 359,946 27,540 46,538 0 74,078 Westpac 2014 6,813 327,365 2,772 209 337,159 31,454 35,652 0 67,106 2015 53,291 1,994,337 290,559 2,525 2,340,712 193,208 227,198 10,498 430,904 Total 2014 22,577 1,399,854 154,398 2,938 1,579,767 170,365 241,873 9,287 421,526
42 | KPMG | FIPS 2015 Registered banks – Analysis of annual results
Analysis of Financial Statements Size & Strength Measures Growth Measures Total Capital Tier 1 Capital Increase in Increase In Location Rank Total Net Loans and Customer Increase in Balance Survey Net Assets Adequacy Adequacy Number of Number of Number of Net Profit Underlying Entity of Head by Total Assets* Advances Deposits Total Assets Date Year $Million Ratio Ratio Employees Branches Owned ATMs After Tax Profit Office Assets $Million $Million $Million % % % % % Australia and New Zealand Banking Group Limited 30-Sep-2015 2015 1 152,177 7,507 13.30 11.30 114,843 83,134 8,104 225 684 3.51 8.62 12.58 Wellington – New Zealand Banking Group 30-Sep-2014 2014 1 135,170 6,723 12.70 10.70 105,949 74,520 8,225 232 663 24.98 20.76 6.86 31-Mar-2015 2015 20 77 44 112.00 112.00 49 32 20 3 3 -34.60 -20.93 10.94 Bank of Baroda (New Zealand) Limited Auckland 31-Mar-2014 2014 17 70 43 118.80 118.80 43 25 18 3 3 83.04 240.70 9.78 31-Dec-2014 2015 21 68 62 424.78 424.78 - - n/d - - n/a n/a n/a Bank of China (New Zealand) Limited Auckland 31-Dec-2013 2014 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 31-Mar-2015 2015 19 86 52 81.00 81.00 62 12 12 3 - 32.62 31.06 24.12 Bank of India (New Zealand) Limited Auckland 31-Mar-2014 2014 18 69 51 94.00 94.00 49 6 11 2 - 72.59 76.00 6.37 30-Sep-2015 2015 3 86,629 6,884 12.67 11.69 68,590 46,729 4,841 173 474 22.12 19.39 8.94 Bank of New Zealand Auckland 30-Sep-2014 2014 3 79,522 5,578 12.04 10.64 64,715 45,379 4,769 177 470 22.30 25.05 5.85 31-Dec-2014 2015 18 92 58 133.43 133.43 4 1 n/d - - n/a n/a n/a China Construction Bank (New Zealand) Limited Auckland 31-Dec-2013 2014 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 31-Dec-2014 2015 13 1,980 196 14.81 13.65 572 923 27 1 - 53.58 45.69 -9.61 Citibank, N.A. New Zealand Branch Auckland 31-Dec-2013 2014 13 2,191 188 15.60 13.52 663 970 27 1 - 7.10 12.11 0.50 Commonwealth Bank of Australia New Zealand 30-Jun-2015 2015 4 80,262 4,997 12.70 11.20 69,288 49,138 4,469 134 462 3.08 0.73 11.18 Auckland Banking Group 30-Jun-2014 2014 4 72,190 5,386 12.00 11.10 63,994 42,884 4,521 140 470 16.87 16.14 1.30 31-Dec-2014 2015 12 2,132 152 16.00 12.90 273 83 29 - - 500.00 650.00 -17.20 Deutsche Bank AG, New Zealand Group Auckland 31-Dec-2013 2014 11 2,575 128 18.50 16.90 184 66 23 - - -69.23 -77.78 -6.67 30-Jun-2015 2015 11 2,778 353 12.86 12.79 2,323 2,085 352 7 - 12.99 17.84 17.20 Heartland Bank Limited Auckland 30-Jun-2014 2014 12 2,371 344 14.39 14.29 1,992 1,732 334 9 - 386.98 649.46 -4.41 Industrial and Commercial Bank of China 31-Dec-2014 2015 16 670 57 36.33 36.33 86 9 23 1 - -4,777.05 -4,701.64 999.21 Auckland (New Zealand) Limited 31-Dec-2013 2014 19 61 60 394.79 394.79 - - 10 1 - 51.59 51.59 0.44 31-Dec-2014 2015 15 1,016 -1 12.53 11.82 47 169 13 - - 400.09 468.89 4.83 JPMorgan Chase Bank, N.A. New Zealand Branch Wellington 31-Dec-2013 2014 15 969 -1 14.13 11.93 52 231 14 - - -189.51 -151.85 30.06 30-Jun-2015 2015 5 18,344 1,033 13.40 11.00 15,639 13,724 1,188 265 243 27.00 24.05 10.00 Kiwibank Limited Wellington 30-Jun-2014 2014 5 16,676 1,003 13.00 10.40 14,667 12,676 1,166 276 244 3.09 3.95 9.65 31-Dec-2014 2015 17 374 4 15.97 13.38 126 151 n/d - - -25.27 -23.74 -10.60 Kookmin Bank Auckland Branch Auckland 31-Dec-2013 2014 16 419 6 15.42 12.61 197 178 n/d - - -7.07 -7.83 7.15 31-Dec-2014 2015 6 13,555 1,340 21.30 16.00 10,001 4,696 305 32 - -14.45 -12.64 11.18 Rabobank Nederland New Zealand Banking Group Wellington 31-Dec-2013 2014 6 12,191 1,192 19.80 16.60 10,006 4,333 310 32 - 66.73 68.33 6.58 31-Mar-2015 2015 10 2,860 241 15.61 13.85 2,407 2,436 428 17 - 24.29 25.64 2.64 Southland Building Society Invercargill 31-Mar-2014 2014 10 2,787 233 13.69 13.39 2,289 2,446 413 17 - 9.07 8.66 -1.48 The Bank of Tokyo-Mitsubishi UFJ Limited, 31-Mar-2015 2015 9 3,019 98 15.61 12.33 2,625 201 17 1 - 96.93 82.44 -12.50 Auckland Auckland Branch 31-Mar-2014 2014 9 3,450 97 15.57 12.21 2,979 125 16 1 - -184.13 -204.84 21.53 31-Mar-2015 2015 14 1,806 150 16.50 16.40 1,565 1,575 305 34 - 24.41 26.97 11.24 The Co-operative Bank Limited Wellington 31-Mar-2014 2014 14 1,624 143 16.80 16.60 1,412 1,405 295 34 - 23.96 27.57 6.72 The Hongkong and Shanghai Banking Corporation 31-Dec-2014 2015 8 5,292 28 15.70 14.40 3,780 3,181 213 1 - 165.11 156.73 5.08 Auckland Limited, New Zealand Branch 31-Dec-2013 2014 8 5,036 -17 15.20 14.10 3,381 3,136 224 3 - -38.26 -37.03 0.16 New 31-Mar-2015 2015 7 5,912 498 13.85 13.53 3,290 5,366 328 27 47 -48.92 -50.08 4.05 TSB Bank Limited Plymouth 31-Mar-2014 2014 7 5,682 477 14.21 13.91 3,102 5,156 306 25 43 -5.95 -7.70 4.66 Westpac Banking Corporation – New Zealand 30-Sep-2015 2015 2 88,336 5,668 13.30 11.40 69,873 51,916 4,497 189 639 -1.28 9.82 8.85 Auckland Division 30-Sep-2014 2014 2 81,153 4,974 12.30 10.60 65,325 49,416 4,469 195 629 19.18 10.34 5.35 2015 467,467 29,421 n/a n/a 365,444 265,561 25,171 1,113 2,552 6.94 10.27 10.20 Bank Sector Total 2014 424,205 26,610 n/a n/a 341,000 244,684 25,151 1,148 2,522 20.41 17.41 5.28 * Total Assets = Total Assets - Goodwill - Other Intangibles
FIPS 2015 | KPMG | 43
Analysis of Financial Statements Size & Strength Measures Growth Measures Total Capital Tier 1 Capital Increase in Increase In Location Rank Total Net Loans and Customer Increase in Balance Survey Net Assets Adequacy Adequacy Number of Number of Number of Net Profit Underlying Entity of Head by Total Assets* Advances Deposits Total Assets Date Year $Million Ratio Ratio Employees Branches Owned ATMs After Tax Profit Office Assets $Million $Million $Million % % % % % Australia and New Zealand Banking Group Limited 30-Sep-2015 2015 1 152,177 7,507 13.30 11.30 114,843 83,134 8,104 225 684 3.51 8.62 12.58 Wellington – New Zealand Banking Group 30-Sep-2014 2014 1 135,170 6,723 12.70 10.70 105,949 74,520 8,225 232 663 24.98 20.76 6.86 31-Mar-2015 2015 20 77 44 112.00 112.00 49 32 20 3 3 -34.60 -20.93 10.94 Bank of Baroda (New Zealand) Limited Auckland 31-Mar-2014 2014 17 70 43 118.80 118.80 43 25 18 3 3 83.04 240.70 9.78 31-Dec-2014 2015 21 68 62 424.78 424.78 - - n/d - - n/a n/a n/a Bank of China (New Zealand) Limited Auckland 31-Dec-2013 2014 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 31-Mar-2015 2015 19 86 52 81.00 81.00 62 12 12 3 - 32.62 31.06 24.12 Bank of India (New Zealand) Limited Auckland 31-Mar-2014 2014 18 69 51 94.00 94.00 49 6 11 2 - 72.59 76.00 6.37 30-Sep-2015 2015 3 86,629 6,884 12.67 11.69 68,590 46,729 4,841 173 474 22.12 19.39 8.94 Bank of New Zealand Auckland 30-Sep-2014 2014 3 79,522 5,578 12.04 10.64 64,715 45,379 4,769 177 470 22.30 25.05 5.85 31-Dec-2014 2015 18 92 58 133.43 133.43 4 1 n/d - - n/a n/a n/a China Construction Bank (New Zealand) Limited Auckland 31-Dec-2013 2014 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 31-Dec-2014 2015 13 1,980 196 14.81 13.65 572 923 27 1 - 53.58 45.69 -9.61 Citibank, N.A. New Zealand Branch Auckland 31-Dec-2013 2014 13 2,191 188 15.60 13.52 663 970 27 1 - 7.10 12.11 0.50 Commonwealth Bank of Australia New Zealand 30-Jun-2015 2015 4 80,262 4,997 12.70 11.20 69,288 49,138 4,469 134 462 3.08 0.73 11.18 Auckland Banking Group 30-Jun-2014 2014 4 72,190 5,386 12.00 11.10 63,994 42,884 4,521 140 470 16.87 16.14 1.30 31-Dec-2014 2015 12 2,132 152 16.00 12.90 273 83 29 - - 500.00 650.00 -17.20 Deutsche Bank AG, New Zealand Group Auckland 31-Dec-2013 2014 11 2,575 128 18.50 16.90 184 66 23 - - -69.23 -77.78 -6.67 30-Jun-2015 2015 11 2,778 353 12.86 12.79 2,323 2,085 352 7 - 12.99 17.84 17.20 Heartland Bank Limited Auckland 30-Jun-2014 2014 12 2,371 344 14.39 14.29 1,992 1,732 334 9 - 386.98 649.46 -4.41 Industrial and Commercial Bank of China 31-Dec-2014 2015 16 670 57 36.33 36.33 86 9 23 1 - -4,777.05 -4,701.64 999.21 Auckland (New Zealand) Limited 31-Dec-2013 2014 19 61 60 394.79 394.79 - - 10 1 - 51.59 51.59 0.44 31-Dec-2014 2015 15 1,016 -1 12.53 11.82 47 169 13 - - 400.09 468.89 4.83 JPMorgan Chase Bank, N.A. New Zealand Branch Wellington 31-Dec-2013 2014 15 969 -1 14.13 11.93 52 231 14 - - -189.51 -151.85 30.06 30-Jun-2015 2015 5 18,344 1,033 13.40 11.00 15,639 13,724 1,188 265 243 27.00 24.05 10.00 Kiwibank Limited Wellington 30-Jun-2014 2014 5 16,676 1,003 13.00 10.40 14,667 12,676 1,166 276 244 3.09 3.95 9.65 31-Dec-2014 2015 17 374 4 15.97 13.38 126 151 n/d - - -25.27 -23.74 -10.60 Kookmin Bank Auckland Branch Auckland 31-Dec-2013 2014 16 419 6 15.42 12.61 197 178 n/d - - -7.07 -7.83 7.15 31-Dec-2014 2015 6 13,555 1,340 21.30 16.00 10,001 4,696 305 32 - -14.45 -12.64 11.18 Rabobank Nederland New Zealand Banking Group Wellington 31-Dec-2013 2014 6 12,191 1,192 19.80 16.60 10,006 4,333 310 32 - 66.73 68.33 6.58 31-Mar-2015 2015 10 2,860 241 15.61 13.85 2,407 2,436 428 17 - 24.29 25.64 2.64 Southland Building Society Invercargill 31-Mar-2014 2014 10 2,787 233 13.69 13.39 2,289 2,446 413 17 - 9.07 8.66 -1.48 The Bank of Tokyo-Mitsubishi UFJ Limited, 31-Mar-2015 2015 9 3,019 98 15.61 12.33 2,625 201 17 1 - 96.93 82.44 -12.50 Auckland Auckland Branch 31-Mar-2014 2014 9 3,450 97 15.57 12.21 2,979 125 16 1 - -184.13 -204.84 21.53 31-Mar-2015 2015 14 1,806 150 16.50 16.40 1,565 1,575 305 34 - 24.41 26.97 11.24 The Co-operative Bank Limited Wellington 31-Mar-2014 2014 14 1,624 143 16.80 16.60 1,412 1,405 295 34 - 23.96 27.57 6.72 The Hongkong and Shanghai Banking Corporation 31-Dec-2014 2015 8 5,292 28 15.70 14.40 3,780 3,181 213 1 - 165.11 156.73 5.08 Auckland Limited, New Zealand Branch 31-Dec-2013 2014 8 5,036 -17 15.20 14.10 3,381 3,136 224 3 - -38.26 -37.03 0.16 New 31-Mar-2015 2015 7 5,912 498 13.85 13.53 3,290 5,366 328 27 47 -48.92 -50.08 4.05 TSB Bank Limited Plymouth 31-Mar-2014 2014 7 5,682 477 14.21 13.91 3,102 5,156 306 25 43 -5.95 -7.70 4.66 Westpac Banking Corporation – New Zealand 30-Sep-2015 2015 2 88,336 5,668 13.30 11.40 69,873 51,916 4,497 189 639 -1.28 9.82 8.85 Auckland Division 30-Sep-2014 2014 2 81,153 4,974 12.30 10.60 65,325 49,416 4,469 195 629 19.18 10.34 5.35 2015 467,467 29,421 n/a n/a 365,444 265,561 25,171 1,113 2,552 6.94 10.27 10.20 Bank Sector Total 2014 424,205 26,610 n/a n/a 341,000 244,684 25,151 1,148 2,522 20.41 17.41 5.28 * Total Assets = Total Assets - Goodwill - Other Intangibles
44 | KPMG | FIPS 2015 Registered banks – Analysis of annual results
Analysis of Financial Statements Credit Quality Measures Profitability Measures Efficiency Measures Individual Total Impaired Provision Provision Net Non- Collective Asset Net Profit Underlying Operating For For Interest interest Net Profit Operating Impaired Gross Provision/ Expense/ Total After Tax/ Profit/ Expenses** Past Due Doubtful Doubtful Income/ Interest Interest Income/ Net Profit After Tax/ Underlying Expenses/ Survey Asset Impaired Net Loans Average Operating Average Average /Average Entity Assets Debts/ Debts/ Average Margin Spread Average After Tax Average Profit Operating Year Expense Assets and Gross Income Total Total Total $Million Gross Gross Total % % Total $Million Equity $Million Income $Million $Million Advances Loans and $Million Assets Assets Assets Impaired Loans and Assets Assets % % % Advances % % % Assets Advances % % % % % Australia and New Zealand Banking Group 2015 76 222 404 40.10 0.41 0.55 0.07 4,037 2.00 2.26 1.83 0.81 1,771 16.91 1.23 2,483 1.73 1.03 36.61 Limited – New Zealand Banking Group 2014 -9 172 668 33.53 0.44 0.65 -0.01 3,737 2.11 2.33 1.90 0.74 1,711 17.26 1.31 2,286 1.75 1.12 39.07 2015 0 0 0 100.00 0.41 0.63 0.11 4 3.51 3.73 1.99 1.81 1 1.91 1.12 1 0.95 4.31 81.00 Bank of Baroda (New Zealand) Limited 2014 0 0 0 100.00 0.40 0.61 0.08 4 3.53 3.84 1.94 2.04 1 2.99 1.90 1 1.32 4.21 75.58 2015 0 0 0 0.00 0.00 0.00 0.00 1 n/a n/a n/a n/a -1 n/a n/a -1 n/a n/a 236.17 Bank of China (New Zealand) Limited 2014 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2015 0 0 0 0.00 0.41 0.41 0.04 4 4.12 4.21 1.57 0.46 1 1.21 0.80 1 1.12 3.43 74.94 Bank of India (New Zealand) Limited 2014 0 0 0 0.00 0.48 0.48 0.24 3 4.22 4.33 1.80 0.56 0 0.92 0.70 1 0.98 3.65 76.43 2015 128 196 215 42.79 0.55 0.68 0.19 2,432 2.09 2.30 1.85 0.84 1,038 16.24 1.25 1,484 1.79 0.99 33.72 Bank of New Zealand 2014 74 208 277 43.32 0.43 0.61 0.12 2,136 2.10 2.30 1.94 0.66 850 14.88 1.10 1,243 1.61 1.06 38.34 China Construction Bank (New Zealand) 2015 0 0 0 0.00 0.08 0.08 0.00 1 n/a n/a n/a n/a -1 n/a n/a -1 n/a n/a 149.33 Limited 2014 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2015 0 0 0 0.00 0.00 0.00 0.00 45 1.91 1.93 1.71 0.23 21 11.02 1.01 29 1.39 0.75 35.14 Citibank, N.A. New Zealand Branch 2014 0 0 0 0.00 0.00 0.00 0.00 43 1.58 1.61 1.47 0.38 14 7.53 0.63 20 0.91 1.06 53.76 Commonwealth Bank of Australia 2015 101 100 365 14.79 0.29 0.37 0.15 2,125 2.22 2.30 1.85 0.57 871 15.79 1.14 1,247 1.64 1.02 36.56 New Zealand Banking Group 2014 54 101 249 23.29 0.28 0.37 0.09 2,036 2.20 2.27 1.84 0.64 845 15.65 1.18 1,238 1.73 1.04 36.54 2015 0 0 0 0.00 0.00 0.00 0.00 56 1.40 1.66 1.76 0.98 24 17.14 1.02 30 1.27 1.10 46.43 Deutsche Bank AG, New Zealand Group 2014 0 0 0 0.00 0.00 0.00 0.00 35 -0.30 -0.33 -0.36 1.61 4 3.19 0.15 4 0.15 1.16 88.57 2015 11 35 30 51.56 0.40 1.05 0.52 128 4.73 4.89 4.34 0.25 41 11.11 1.59 55 2.13 2.41 48.47 Heartland Bank Limited 2014 6 34 32 29.55 0.35 0.82 0.29 114 4.39 4.59 4.05 0.31 36 9.94 1.49 47 1.92 2.54 53.97 Industrial and Commercial Bank of China 2015 0 0 0 0.00 0.56 0.56 1.12 4 0.81 0.82 0.78 0.17 -3 -5.07 -0.81 -3 -0.80 1.65 168.02 (New Zealand) Limited 2014 0 0 0 0.00 0.00 0.00 0.00 0 0.76 0.78 0.15 -0.01 0 -0.10 -0.10 0 -0.10 0.85 113.35 JPMorgan Chase Bank, N.A. New Zealand 2015 0 0 0 0.00 0.00 0.00 0.00 19 0.58 0.77 0.71 1.36 6 0.00 0.64 9 0.95 0.99 50.94 Branch 2014 0 0 0 0.00 0.00 0.00 0.00 9 0.70 1.15 1.09 0.39 -2 0.00 -0.25 -3 -0.30 1.39 127.29 2015 13 11 23 52.17 0.26 0.34 0.09 473 2.06 2.12 1.60 0.64 127 12.48 0.73 196 1.12 1.51 55.81 Kiwibank Limited 2014 -4 11 44 50.00 0.25 0.40 -0.03 400 1.84 1.87 1.40 0.67 100 10.75 0.63 158 0.99 1.54 61.50 2015 0 0 0 0.00 0.44 0.44 -0.06 8 1.65 1.66 1.64 0.47 4 74.25 0.96 5 1.36 0.78 36.89 Kookmin Bank Auckland Branch 2014 0 0 0 63.35 0.33 0.37 0.13 10 1.92 1.93 1.90 0.57 5 91.13 1.25 7 1.75 0.69 27.55 Rabobank Nederland New Zealand Banking 2015 -19 22 239 23.50 0.12 0.68 -0.19 295 2.57 2.62 2.28 -0.28 148 11.66 1.15 211 1.64 0.81 35.18 Group 2014 1 29 404 23.31 0.17 1.10 0.01 343 2.68 2.74 2.43 0.23 173 15.61 1.46 241 2.04 0.86 29.42 2015 12 5 13 45.09 0.51 0.75 0.52 107 2.87 2.91 2.57 0.90 19 8.13 0.69 28 1.00 2.34 62.09 Southland Building Society 2014 11 8 20 49.43 0.47 0.90 0.46 91 2.47 2.51 2.19 0.76 16 6.71 0.56 22 0.80 2.06 63.66 The Bank of Tokyo-Mitsubishi UFJ Limited, 2015 30 0 64 100.00 0.00 2.37 1.04 29 0.46 0.47 0.40 0.45 0 -0.51 -0.02 -4 -0.14 0.13 14.61 Auckland Branch 2014 50 0 64 53.00 0.00 1.13 1.83 30 0.38 0.39 0.31 0.57 -16 -15.34 -0.52 -25 -0.79 0.14 14.54 2015 1 7 1 61.74 0.20 0.26 0.07 66 2.85 2.88 2.35 1.02 9 6.06 0.52 13 0.78 3.02 78.23 The Co-operative Bank Limited 2014 1 3 3 31.54 0.25 0.30 0.11 62 2.73 2.76 2.34 1.23 7 5.14 0.45 11 0.67 3.19 80.66 The Hongkong and Shanghai Banking 2015 -18 0 122 17.00 0.14 0.68 -0.50 133 1.74 1.82 1.71 0.84 66 300.37 1.29 94 1.82 1.11 42.89 Corporation Limited, New Zealand Branch 2014 43 0 142 28.40 0.25 1.42 1.26 136 1.57 1.65 1.56 1.14 25 320.37 0.50 37 0.73 1.13 41.70 2015 56 2 1 61.42 0.45 0.46 1.75 147 2.17 2.19 1.74 0.36 26 5.23 0.44 34 0.59 0.98 38.62 TSB Bank Limited 2014 11 7 4 47.22 0.43 0.49 0.38 130 1.97 2.00 1.55 0.37 50 10.92 0.90 68 1.23 0.91 38.85 Westpac Banking Corporation – 2015 47 83 282 41.84 0.43 0.59 0.07 2,371 2.10 2.29 1.79 0.70 1,006 17.21 1.19 1,476 1.74 1.00 35.77 New Zealand Division 2014 26 90 346 41.62 0.46 0.68 0.04 2,180 2.01 2.18 1.76 0.75 1,019 19.79 1.29 1,344 1.70 1.02 37.16 2015 438 683 1,758 34.18 0.39 0.56 0.12 12,485 2.10 2.28 1.84 0.70 5,174 15.96 1.16 7,388 1.66 1.05 37.32 Bank Sector Total 2014 265 663 2,253 33.68 0.39 0.61 0.08 11,501 2.09 2.24 1.85 0.69 4,838 16.13 1.17 6,700 1.62 1.10 39.44 ** Operating Expenses = Total Expenses - Interest Expense - Loan Write Offs and Bad Debts - Abnormal Expenses.
FIPS 2015 | KPMG | 45
Analysis of Financial Statements Credit Quality Measures Profitability Measures Efficiency Measures Individual Total Impaired Provision Provision Net Non- Collective Asset Net Profit Underlying Operating For For Interest interest Net Profit Operating Impaired Gross Provision/ Expense/ Total After Tax/ Profit/ Expenses** Past Due Doubtful Doubtful Income/ Interest Interest Income/ Net Profit After Tax/ Underlying Expenses/ Survey Asset Impaired Net Loans Average Operating Average Average /Average Entity Assets Debts/ Debts/ Average Margin Spread Average After Tax Average Profit Operating Year Expense Assets and Gross Income Total Total Total $Million Gross Gross Total % % Total $Million Equity $Million Income $Million $Million Advances Loans and $Million Assets Assets Assets Impaired Loans and Assets Assets % % % Advances % % % Assets Advances % % % % % Australia and New Zealand Banking Group 2015 76 222 404 40.10 0.41 0.55 0.07 4,037 2.00 2.26 1.83 0.81 1,771 16.91 1.23 2,483 1.73 1.03 36.61 Limited – New Zealand Banking Group 2014 -9 172 668 33.53 0.44 0.65 -0.01 3,737 2.11 2.33 1.90 0.74 1,711 17.26 1.31 2,286 1.75 1.12 39.07 2015 0 0 0 100.00 0.41 0.63 0.11 4 3.51 3.73 1.99 1.81 1 1.91 1.12 1 0.95 4.31 81.00 Bank of Baroda (New Zealand) Limited 2014 0 0 0 100.00 0.40 0.61 0.08 4 3.53 3.84 1.94 2.04 1 2.99 1.90 1 1.32 4.21 75.58 2015 0 0 0 0.00 0.00 0.00 0.00 1 n/a n/a n/a n/a -1 n/a n/a -1 n/a n/a 236.17 Bank of China (New Zealand) Limited 2014 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2015 0 0 0 0.00 0.41 0.41 0.04 4 4.12 4.21 1.57 0.46 1 1.21 0.80 1 1.12 3.43 74.94 Bank of India (New Zealand) Limited 2014 0 0 0 0.00 0.48 0.48 0.24 3 4.22 4.33 1.80 0.56 0 0.92 0.70 1 0.98 3.65 76.43 2015 128 196 215 42.79 0.55 0.68 0.19 2,432 2.09 2.30 1.85 0.84 1,038 16.24 1.25 1,484 1.79 0.99 33.72 Bank of New Zealand 2014 74 208 277 43.32 0.43 0.61 0.12 2,136 2.10 2.30 1.94 0.66 850 14.88 1.10 1,243 1.61 1.06 38.34 China Construction Bank (New Zealand) 2015 0 0 0 0.00 0.08 0.08 0.00 1 n/a n/a n/a n/a -1 n/a n/a -1 n/a n/a 149.33 Limited 2014 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2015 0 0 0 0.00 0.00 0.00 0.00 45 1.91 1.93 1.71 0.23 21 11.02 1.01 29 1.39 0.75 35.14 Citibank, N.A. New Zealand Branch 2014 0 0 0 0.00 0.00 0.00 0.00 43 1.58 1.61 1.47 0.38 14 7.53 0.63 20 0.91 1.06 53.76 Commonwealth Bank of Australia 2015 101 100 365 14.79 0.29 0.37 0.15 2,125 2.22 2.30 1.85 0.57 871 15.79 1.14 1,247 1.64 1.02 36.56 New Zealand Banking Group 2014 54 101 249 23.29 0.28 0.37 0.09 2,036 2.20 2.27 1.84 0.64 845 15.65 1.18 1,238 1.73 1.04 36.54 2015 0 0 0 0.00 0.00 0.00 0.00 56 1.40 1.66 1.76 0.98 24 17.14 1.02 30 1.27 1.10 46.43 Deutsche Bank AG, New Zealand Group 2014 0 0 0 0.00 0.00 0.00 0.00 35 -0.30 -0.33 -0.36 1.61 4 3.19 0.15 4 0.15 1.16 88.57 2015 11 35 30 51.56 0.40 1.05 0.52 128 4.73 4.89 4.34 0.25 41 11.11 1.59 55 2.13 2.41 48.47 Heartland Bank Limited 2014 6 34 32 29.55 0.35 0.82 0.29 114 4.39 4.59 4.05 0.31 36 9.94 1.49 47 1.92 2.54 53.97 Industrial and Commercial Bank of China 2015 0 0 0 0.00 0.56 0.56 1.12 4 0.81 0.82 0.78 0.17 -3 -5.07 -0.81 -3 -0.80 1.65 168.02 (New Zealand) Limited 2014 0 0 0 0.00 0.00 0.00 0.00 0 0.76 0.78 0.15 -0.01 0 -0.10 -0.10 0 -0.10 0.85 113.35 JPMorgan Chase Bank, N.A. New Zealand 2015 0 0 0 0.00 0.00 0.00 0.00 19 0.58 0.77 0.71 1.36 6 0.00 0.64 9 0.95 0.99 50.94 Branch 2014 0 0 0 0.00 0.00 0.00 0.00 9 0.70 1.15 1.09 0.39 -2 0.00 -0.25 -3 -0.30 1.39 127.29 2015 13 11 23 52.17 0.26 0.34 0.09 473 2.06 2.12 1.60 0.64 127 12.48 0.73 196 1.12 1.51 55.81 Kiwibank Limited 2014 -4 11 44 50.00 0.25 0.40 -0.03 400 1.84 1.87 1.40 0.67 100 10.75 0.63 158 0.99 1.54 61.50 2015 0 0 0 0.00 0.44 0.44 -0.06 8 1.65 1.66 1.64 0.47 4 74.25 0.96 5 1.36 0.78 36.89 Kookmin Bank Auckland Branch 2014 0 0 0 63.35 0.33 0.37 0.13 10 1.92 1.93 1.90 0.57 5 91.13 1.25 7 1.75 0.69 27.55 Rabobank Nederland New Zealand Banking 2015 -19 22 239 23.50 0.12 0.68 -0.19 295 2.57 2.62 2.28 -0.28 148 11.66 1.15 211 1.64 0.81 35.18 Group 2014 1 29 404 23.31 0.17 1.10 0.01 343 2.68 2.74 2.43 0.23 173 15.61 1.46 241 2.04 0.86 29.42 2015 12 5 13 45.09 0.51 0.75 0.52 107 2.87 2.91 2.57 0.90 19 8.13 0.69 28 1.00 2.34 62.09 Southland Building Society 2014 11 8 20 49.43 0.47 0.90 0.46 91 2.47 2.51 2.19 0.76 16 6.71 0.56 22 0.80 2.06 63.66 The Bank of Tokyo-Mitsubishi UFJ Limited, 2015 30 0 64 100.00 0.00 2.37 1.04 29 0.46 0.47 0.40 0.45 0 -0.51 -0.02 -4 -0.14 0.13 14.61 Auckland Branch 2014 50 0 64 53.00 0.00 1.13 1.83 30 0.38 0.39 0.31 0.57 -16 -15.34 -0.52 -25 -0.79 0.14 14.54 2015 1 7 1 61.74 0.20 0.26 0.07 66 2.85 2.88 2.35 1.02 9 6.06 0.52 13 0.78 3.02 78.23 The Co-operative Bank Limited 2014 1 3 3 31.54 0.25 0.30 0.11 62 2.73 2.76 2.34 1.23 7 5.14 0.45 11 0.67 3.19 80.66 The Hongkong and Shanghai Banking 2015 -18 0 122 17.00 0.14 0.68 -0.50 133 1.74 1.82 1.71 0.84 66 300.37 1.29 94 1.82 1.11 42.89 Corporation Limited, New Zealand Branch 2014 43 0 142 28.40 0.25 1.42 1.26 136 1.57 1.65 1.56 1.14 25 320.37 0.50 37 0.73 1.13 41.70 2015 56 2 1 61.42 0.45 0.46 1.75 147 2.17 2.19 1.74 0.36 26 5.23 0.44 34 0.59 0.98 38.62 TSB Bank Limited 2014 11 7 4 47.22 0.43 0.49 0.38 130 1.97 2.00 1.55 0.37 50 10.92 0.90 68 1.23 0.91 38.85 Westpac Banking Corporation – 2015 47 83 282 41.84 0.43 0.59 0.07 2,371 2.10 2.29 1.79 0.70 1,006 17.21 1.19 1,476 1.74 1.00 35.77 New Zealand Division 2014 26 90 346 41.62 0.46 0.68 0.04 2,180 2.01 2.18 1.76 0.75 1,019 19.79 1.29 1,344 1.70 1.02 37.16 2015 438 683 1,758 34.18 0.39 0.56 0.12 12,485 2.10 2.28 1.84 0.70 5,174 15.96 1.16 7,388 1.66 1.05 37.32 Bank Sector Total 2014 265 663 2,253 33.68 0.39 0.61 0.08 11,501 2.09 2.24 1.85 0.69 4,838 16.13 1.17 6,700 1.62 1.10 39.44 ** Operating Expenses = Total Expenses - Interest Expense - Loan Write Offs and Bad Debts - Abnormal Expenses.
46 | KPMG | FIPS 2015 Registered banks – Analysis of annual results
Balance Sheet Breakdown Assets ($Million) Liabilities ($Million) Equity ($Million)
Entity Banks Shares Reserves Provisions) Intangibles Total Equity Total Instruments Instruments Total Assets Total Fixed Assets Other Assets Balance Date Total Liabilities Total Debt Securities Other Liabilities Retained Earnings Subordinated Debt Customer Deposits Derivative Financial Derivative Financial Head Office Account Convertible Debentures/ Share Capital – Ordinary and Balances With Other and Investment Properties Loans and Advances (Less Balances With Other Banks Investments in Subsidiaries And Money Market Deposits Perpetual Preference Shares Cash On Hand, Money At Call Other Equity/Cash Flow Hedge Balances With Related Parties Balances With Related Parties Trading, Investment Securities, Trading, 2015 Australia and New Zealand Banking Group Limited – 30-Sep 4,532 13,718 13,650 114,376 4,179 388 3,492 1,195 83,134 2,417 26,848 13,926 14,093 2,381 1,871 8,047 11 0 -10 2,812 New Zealand Banking Group 155,530 144,670 10,860 Bank of Baroda (New Zealand) Limited 31-Mar 23 0 0 49 3 1 0 1 77 32 0 0 0 1 0 0 34 40 0 0 0 4 44 Bank of China (New Zealand) Limited 31-Dec 67 0 0 0 0 1 0 0 68 0 0 0 0 5 0 0 6 63 0 0 0 -1 62 Bank of India (New Zealand) Limited 31-Mar 18 0 0 62 4 1 0 0 86 12 0 0 0 21 0 0 34 50 0 0 0 2 52 Bank of New Zealand 30-Sep 3,643 4,918 7,895 68,216 1,259 176 158 522 86,787 46,729 1,439 21,183 8,310 1,095 0 989 79,745 2,351 0 650 96 3,945 7,042 China Construction Bank (New Zealand) Limited 31-Dec 76 0 0 4 12 1 0 0 92 1 33 0 0 1 0 0 34 59 0 0 0 -1 58 Citibank, N.A. New Zealand Branch 31-Dec 450 751 0 572 143 1 0 62 1,980 923 15 0 0 837 0 9 1,785 29 34 0 0 134 196 Commonwealth Bank of Australia New Zealand Banking Group 30-Jun 3,174 4,675 1,759 69,087 641 189 438 622 80,585 49,138 1,003 13,759 1,193 5,774 3,784 614 75,265 704 462 1,480 496 2,178 5,320 Deutsche Bank AG, New Zealand Group 31-Dec 48 353 0 273 1,444 1 0 13 2,132 83 210 71 0 1,608 0 8 1,980 20 0 0 3 129 152 Heartland Bank Limited 30-Jun 32 323 0 2,314 29 5 26 70 2,799 2,085 0 262 3 32 0 44 2,426 341 0 0 0 32 373 Industrial and Commercial Bank of China (New Zealand) 31-Dec 582 0 0 86 0 2 0 1 9 4 50 0 547 0 3 60 0 0 -3 0 Limited 670 613 57 JPMorgan Chase Bank, N.A. New Zealand Branch 31-Dec 321 448 0 47 19 0 1 180 1,016 169 0 397 0 259 0 192 1,016 0 0 0 0 0 0 Kiwibank Limited 30-Jun 686 1,318 480 15,598 77 20 116 49 18,344 13,724 325 2,397 475 22 255 113 17,311 400 0 0 101 532 1,033 Kookmin Bank Auckland Branch 31-Dec 3 0 0 125 246 0 0 0 374 151 189 0 0 30 0 1 370 0 4 0 0 0 4 Rabobank Nederland New Zealand Banking Group 31-Dec 320 687 16 9,989 2,472 6 0 65 13,555 4,696 0 2,787 35 4,624 0 72 12,215 551 169 0 0 620 1,340 Southland Building Society 31-Mar 128 306 2 2,395 2 19 5 6 2,863 2,436 0 65 10 39 41 28 2,619 0 0 0 5 238 244 The Bank of Tokyo-Mitsubishi UFJ Limited, Auckland Branch 31-Mar 77 223 5 2,625 68 1 0 21 3,019 201 0 0 8 2,710 0 1 2,921 0 83 0 1 15 98 The Co-operative Bank Limited 31-Mar 209 10 2 1,562 0 8 11 5 1,806 1,575 0 61 6 0 0 15 1,656 0 0 0 -1 151 150 The Hongkong and Shanghai Banking Corporation Limited, 31-Dec 426 495 116 3,775 448 1 18 30 3,181 182 740 72 1,040 0 50 0 42 0 2 0 New Zealand Branch 5,309 5,265 44 TSB Bank Limited 31-Mar 107 2,450 1 3,275 0 16 4 59 5,912 5,366 0 0 1 0 0 47 5,414 10 0 0 0 488 498 Westpac Banking Corporation – New Zealand Division 30-Sep 1,107 7,636 5,459 69,576 3,451 164 658 810 88,861 51,916 837 15,755 6,717 4,288 1,984 1,171 82,668 143 1,824 0 -102 4,328 6,193 Bank Sector Total 16,028 38,311 29,384 364,006 14,498 1,000 4,927 3,712 471,866 265,561 6,654 84,374 30,756 37,026 8,445 5,229 438,046 12,868 2,629 2,130 587 15,606 33,820 2014 Australia and New Zealand Banking Group Limited – 30-Sep 3,262 13,182 7,657 105,485 4,539 380 3,454 569 74,520 2,898 26,044 6,385 16,137 835 1,628 7,393 0 0 -7 2,695 New Zealand Banking Group 138,528 128,447 10,081 Bank of Baroda (New Zealand) Limited 31-Mar 22 0 0 43 3 1 0 1 70 25 0 0 0 1 0 0 27 40 0 0 0 3 43 Bank of India (New Zealand) Limited 31-Mar 16 0 0 49 3 1 0 0 69 6 0 0 0 12 0 0 18 50 0 0 0 1 51 Bank of New Zealand 30-Sep 4,601 4,396 4,644 64,437 743 189 163 512 79,685 45,379 2,147 19,614 4,438 1,265 0 1,101 73,944 1,851 0 650 -17 3,257 5,741 Citibank, N.A. New Zealand Branch 31-Dec 633 594 0 663 220 1 0 79 2,191 970 36 0 0 990 0 8 2,003 29 33 0 0 126 188 Commonwealth Bank of Australia New Zealand Banking Group 30-Jun 2,027 4,197 744 63,815 348 201 436 745 72,513 42,884 353 12,368 899 7,182 2,539 579 66,804 704 462 1,482 587 2,474 5,709 Deutsche Bank AG, New Zealand Group 31-Dec 100 616 0 184 1,638 2 0 35 2,575 66 334 385 0 1,438 208 16 2,447 20 0 0 3 105 128 Heartland Bank Limited 30-Jun 35 239 2 1,985 29 10 22 69 2,391 1,732 0 232 0 28 0 34 2,026 340 0 0 1 23 364 Industrial and Commercial Bank of China (New Zealand) 31-Dec 58 0 0 0 0 2 0 1 0 0 0 0 0 0 1 60 0 0 0 0 Limited 61 1 60 JPMorgan Chase Bank, N.A. New Zealand Branch 31-Dec 305 333 0 52 28 0 1 251 970 231 0 303 0 189 0 247 970 0 0 0 0 0 0 Kiwibank Limited 30-Jun 582 1,137 130 14,630 77 13 86 21 16,676 12,676 185 2,143 236 102 247 84 15,673 400 0 149 18 436 1,003 Kookmin Bank Auckland Branch 31-Dec 2 0 0 197 219 0 0 0 419 178 189 0 0 45 0 1 413 0 6 0 0 0 6 Rabobank Nederland New Zealand Banking Group 31-Dec 37 586 21 9,989 1,483 5 0 70 12,191 4,333 0 3,029 38 3,531 0 68 10,999 551 128 0 -1 513 1,192 Southland Building Society 31-Mar 110 359 10 2,278 0 22 4 4 2,788 2,446 50 0 1 12 19 25 2,554 0 0 0 13 221 234 The Bank of Tokyo-Mitsubishi UFJ Limited, Auckland Branch 31-Mar 135 284 4 2,979 34 1 0 13 3,450 125 0 0 10 3,215 0 2 3,353 0 83 0 -1 15 97 The Co-operative Bank Limited 31-Mar 47 148 3 1,408 0 7 8 3 1,624 1,405 0 58 1 0 0 16 1,481 0 0 0 1 143 143 The Hongkong and Shanghai Banking Corporation Limited, 31-Dec 778 400 117 3,373 338 1 20 27 3,136 158 792 120 810 0 37 0 -4 0 4 0 New Zealand Branch 5,054 5,053 0 TSB Bank Limited 31-Mar 86 2,444 2 3,088 0 14 0 47 5,682 5,156 0 0 1 0 0 47 5,205 10 0 0 0 467 477 Westpac Banking Corporation – New Zealand Division 30-Sep 2,518 6,572 4,180 65,027 1,770 178 715 718 81,678 49,416 1,141 13,746 4,123 5,157 710 1,886 76,179 143 1,750 0 51 3,555 5,499 Bank Sector Total 15,355 35,485 17,512 339,683 11,473 1,030 4,909 3,166 428,613 244,684 7,491 78,715 16,254 40,113 4,558 5,781 397,595 11,591 2,459 2,281 652 14,035 31,018
FIPS 2015 | KPMG | 47
Balance Sheet Breakdown Assets ($Million) Liabilities ($Million) Equity ($Million)
Entity Banks Shares Reserves Provisions) Intangibles Total Equity Total Instruments Instruments Total Assets Total Fixed Assets Other Assets Balance Date Total Liabilities Total Debt Securities Other Liabilities Retained Earnings Subordinated Debt Customer Deposits Derivative Financial Derivative Financial Head Office Account Convertible Debentures/ Share Capital – Ordinary and Balances With Other and Investment Properties Loans and Advances (Less Balances With Other Banks Investments in Subsidiaries And Money Market Deposits Perpetual Preference Shares Cash On Hand, Money At Call Other Equity/Cash Flow Hedge Balances With Related Parties Balances With Related Parties Trading, Investment Securities, Trading, 2015 Australia and New Zealand Banking Group Limited – 30-Sep 4,532 13,718 13,650 114,376 4,179 388 3,492 1,195 83,134 2,417 26,848 13,926 14,093 2,381 1,871 8,047 11 0 -10 2,812 New Zealand Banking Group 155,530 144,670 10,860 Bank of Baroda (New Zealand) Limited 31-Mar 23 0 0 49 3 1 0 1 77 32 0 0 0 1 0 0 34 40 0 0 0 4 44 Bank of China (New Zealand) Limited 31-Dec 67 0 0 0 0 1 0 0 68 0 0 0 0 5 0 0 6 63 0 0 0 -1 62 Bank of India (New Zealand) Limited 31-Mar 18 0 0 62 4 1 0 0 86 12 0 0 0 21 0 0 34 50 0 0 0 2 52 Bank of New Zealand 30-Sep 3,643 4,918 7,895 68,216 1,259 176 158 522 86,787 46,729 1,439 21,183 8,310 1,095 0 989 79,745 2,351 0 650 96 3,945 7,042 China Construction Bank (New Zealand) Limited 31-Dec 76 0 0 4 12 1 0 0 92 1 33 0 0 1 0 0 34 59 0 0 0 -1 58 Citibank, N.A. New Zealand Branch 31-Dec 450 751 0 572 143 1 0 62 1,980 923 15 0 0 837 0 9 1,785 29 34 0 0 134 196 Commonwealth Bank of Australia New Zealand Banking Group 30-Jun 3,174 4,675 1,759 69,087 641 189 438 622 80,585 49,138 1,003 13,759 1,193 5,774 3,784 614 75,265 704 462 1,480 496 2,178 5,320 Deutsche Bank AG, New Zealand Group 31-Dec 48 353 0 273 1,444 1 0 13 2,132 83 210 71 0 1,608 0 8 1,980 20 0 0 3 129 152 Heartland Bank Limited 30-Jun 32 323 0 2,314 29 5 26 70 2,799 2,085 0 262 3 32 0 44 2,426 341 0 0 0 32 373 Industrial and Commercial Bank of China (New Zealand) 31-Dec 582 0 0 86 0 2 0 1 9 4 50 0 547 0 3 60 0 0 -3 0 Limited 670 613 57 JPMorgan Chase Bank, N.A. New Zealand Branch 31-Dec 321 448 0 47 19 0 1 180 1,016 169 0 397 0 259 0 192 1,016 0 0 0 0 0 0 Kiwibank Limited 30-Jun 686 1,318 480 15,598 77 20 116 49 18,344 13,724 325 2,397 475 22 255 113 17,311 400 0 0 101 532 1,033 Kookmin Bank Auckland Branch 31-Dec 3 0 0 125 246 0 0 0 374 151 189 0 0 30 0 1 370 0 4 0 0 0 4 Rabobank Nederland New Zealand Banking Group 31-Dec 320 687 16 9,989 2,472 6 0 65 13,555 4,696 0 2,787 35 4,624 0 72 12,215 551 169 0 0 620 1,340 Southland Building Society 31-Mar 128 306 2 2,395 2 19 5 6 2,863 2,436 0 65 10 39 41 28 2,619 0 0 0 5 238 244 The Bank of Tokyo-Mitsubishi UFJ Limited, Auckland Branch 31-Mar 77 223 5 2,625 68 1 0 21 3,019 201 0 0 8 2,710 0 1 2,921 0 83 0 1 15 98 The Co-operative Bank Limited 31-Mar 209 10 2 1,562 0 8 11 5 1,806 1,575 0 61 6 0 0 15 1,656 0 0 0 -1 151 150 The Hongkong and Shanghai Banking Corporation Limited, 31-Dec 426 495 116 3,775 448 1 18 30 3,181 182 740 72 1,040 0 50 0 42 0 2 0 New Zealand Branch 5,309 5,265 44 TSB Bank Limited 31-Mar 107 2,450 1 3,275 0 16 4 59 5,912 5,366 0 0 1 0 0 47 5,414 10 0 0 0 488 498 Westpac Banking Corporation – New Zealand Division 30-Sep 1,107 7,636 5,459 69,576 3,451 164 658 810 88,861 51,916 837 15,755 6,717 4,288 1,984 1,171 82,668 143 1,824 0 -102 4,328 6,193 Bank Sector Total 16,028 38,311 29,384 364,006 14,498 1,000 4,927 3,712 471,866 265,561 6,654 84,374 30,756 37,026 8,445 5,229 438,046 12,868 2,629 2,130 587 15,606 33,820 2014 Australia and New Zealand Banking Group Limited – 30-Sep 3,262 13,182 7,657 105,485 4,539 380 3,454 569 74,520 2,898 26,044 6,385 16,137 835 1,628 7,393 0 0 -7 2,695 New Zealand Banking Group 138,528 128,447 10,081 Bank of Baroda (New Zealand) Limited 31-Mar 22 0 0 43 3 1 0 1 70 25 0 0 0 1 0 0 27 40 0 0 0 3 43 Bank of India (New Zealand) Limited 31-Mar 16 0 0 49 3 1 0 0 69 6 0 0 0 12 0 0 18 50 0 0 0 1 51 Bank of New Zealand 30-Sep 4,601 4,396 4,644 64,437 743 189 163 512 79,685 45,379 2,147 19,614 4,438 1,265 0 1,101 73,944 1,851 0 650 -17 3,257 5,741 Citibank, N.A. New Zealand Branch 31-Dec 633 594 0 663 220 1 0 79 2,191 970 36 0 0 990 0 8 2,003 29 33 0 0 126 188 Commonwealth Bank of Australia New Zealand Banking Group 30-Jun 2,027 4,197 744 63,815 348 201 436 745 72,513 42,884 353 12,368 899 7,182 2,539 579 66,804 704 462 1,482 587 2,474 5,709 Deutsche Bank AG, New Zealand Group 31-Dec 100 616 0 184 1,638 2 0 35 2,575 66 334 385 0 1,438 208 16 2,447 20 0 0 3 105 128 Heartland Bank Limited 30-Jun 35 239 2 1,985 29 10 22 69 2,391 1,732 0 232 0 28 0 34 2,026 340 0 0 1 23 364 Industrial and Commercial Bank of China (New Zealand) 31-Dec 58 0 0 0 0 2 0 1 0 0 0 0 0 0 1 60 0 0 0 0 Limited 61 1 60 JPMorgan Chase Bank, N.A. New Zealand Branch 31-Dec 305 333 0 52 28 0 1 251 970 231 0 303 0 189 0 247 970 0 0 0 0 0 0 Kiwibank Limited 30-Jun 582 1,137 130 14,630 77 13 86 21 16,676 12,676 185 2,143 236 102 247 84 15,673 400 0 149 18 436 1,003 Kookmin Bank Auckland Branch 31-Dec 2 0 0 197 219 0 0 0 419 178 189 0 0 45 0 1 413 0 6 0 0 0 6 Rabobank Nederland New Zealand Banking Group 31-Dec 37 586 21 9,989 1,483 5 0 70 12,191 4,333 0 3,029 38 3,531 0 68 10,999 551 128 0 -1 513 1,192 Southland Building Society 31-Mar 110 359 10 2,278 0 22 4 4 2,788 2,446 50 0 1 12 19 25 2,554 0 0 0 13 221 234 The Bank of Tokyo-Mitsubishi UFJ Limited, Auckland Branch 31-Mar 135 284 4 2,979 34 1 0 13 3,450 125 0 0 10 3,215 0 2 3,353 0 83 0 -1 15 97 The Co-operative Bank Limited 31-Mar 47 148 3 1,408 0 7 8 3 1,624 1,405 0 58 1 0 0 16 1,481 0 0 0 1 143 143 The Hongkong and Shanghai Banking Corporation Limited, 31-Dec 778 400 117 3,373 338 1 20 27 3,136 158 792 120 810 0 37 0 -4 0 4 0 New Zealand Branch 5,054 5,053 0 TSB Bank Limited 31-Mar 86 2,444 2 3,088 0 14 0 47 5,682 5,156 0 0 1 0 0 47 5,205 10 0 0 0 467 477 Westpac Banking Corporation – New Zealand Division 30-Sep 2,518 6,572 4,180 65,027 1,770 178 715 718 81,678 49,416 1,141 13,746 4,123 5,157 710 1,886 76,179 143 1,750 0 51 3,555 5,499 Bank Sector Total 15,355 35,485 17,512 339,683 11,473 1,030 4,909 3,166 428,613 244,684 7,491 78,715 16,254 40,113 4,558 5,781 397,595 11,591 2,459 2,281 652 14,035 31,018
48 | KPMG | FIPS 2015 Major banks – Quarterly analysis
Size & Strength Measures Profitability Measures Entity Entity 31 Dec 13 31 Mar 14 30 Jun 14 30 Sep 14 31 Dec 14 31 Mar 15 30 Jun 15 30 Sep 15 31 Dec 13 31 Mar 14 30 Jun 14 30 Sep 14 31 Dec 14 31 Mar 15 30 Jun 15 30 Sep 15
Total Assets6 ($Million) Interest Margin (%) ANZ4 128,109 129,529 132,422 135,074 135,290 140,253 150,664 152,038 ANZ4 2.35 2.30 2.27 2.32 2.33 2.23 2.21 2.23 BNZ 75,481 76,740 75,845 79,522 79,658 81,926 85,657 86,629 BNZ 2.32 2.30 2.37 2.28 2.28 2.34 2.36 2.30 CBA + ASB4 71,950 72,586 72,077 73,483 74,149 76,994 80,147 81,321 CBA + ASB4 2.26 2.24 2.29 2.40 2.40 2.27 2.21 2.13 Heartland Bank 2,462 2,423 2,368 2,431 2,543 2,623 2,772 2,825 Heartland Bank 4.61 4.45 4.94 4.99 5.06 4.91 4.83 4.81 Kiwibank 16,032 16,344 16,590 16,882 17,064 17,948 18,228 18,686 Kiwibank 1.82 1.82 1.96 2.13 2.17 2.12 2.07 2.13 Southland Building Society 2,806 2,784 2,786 2,825 2,826 2,858 3,094 3,163 Southland Building Society 2.53 2.58 2.81 2.97 2.97 2.93 2.86 2.67 The Co-operative Bank Limited 1,595 1,616 1,664 1,704 1,770 1,795 1,838 1,896 The Co-operative Bank Limited 2.78 2.78 2.85 2.95 2.90 2.80 2.81 2.77 TSB Bank Limited 5,684 5,682 5,655 5,736 5,908 5,908 5,991 6,208 TSB Bank Limited 2.01 1.99 2.17 2.30 2.15 2.20 2.12 2.14 Westpac4 76,807 78,857 80,392 80,963 82,442 82,087 87,455 88,203 Westpac4 2.12 2.14 2.18 2.23 2.28 2.26 2.32 2.28 Total 380,926 386,561 389,799 398,619 401,649 412,392 435,846 440,968 Average 2.27 2.25 2.28 2.32 2.34 2.29 2.28 2.25 Increase in Gross Loans and Advances (%) Non-interest Income/Total Tangible Assets (%) ANZ4 1.81 0.99 1.30 1.31 1.53 1.75 3.60 0.86 ANZ4 0.65 0.31 0.73 1.00 0.79 0.90 0.76 0.80 BNZ 0.69 0.42 1.45 0.93 1.16 1.57 1.01 1.72 BNZ 0.61 0.47 0.53 1.06 0.63 0.94 0.97 0.83 CBA + ASB4 0.92 0.49 0.96 1.87 1.19 2.75 2.04 2.29 CBA + ASB4 0.64 0.59 0.64 0.58 0.63 0.56 0.52 0.66 Heartland Bank -2.96 -0.49 3.77 3.15 4.50 4.10 4.11 3.21 Heartland Bank 0.52 0.63 0.45 0.33 0.41 0.41 0.36 0.39 Kiwibank 3.73 2.87 1.85 0.66 2.20 2.04 1.50 2.24 Kiwibank 0.66 0.77 0.58 0.72 0.73 0.57 0.57 0.59 Southland Building Society 0.62 0.03 -0.53 -0.10 2.88 2.50 11.34 2.71 Southland Building Society 0.74 0.71 0.77 0.93 0.96 1.03 0.98 0.95 The Co-operative Bank Limited 3.83 3.02 2.58 2.74 2.93 2.19 3.24 4.28 The Co-operative Bank Limited 1.30 0.90 1.17 1.14 1.13 0.24 1.00 0.99 TSB Bank Limited 1.31 0.26 0.94 0.20 3.04 1.73 5.27 3.39 TSB Bank Limited 0.32 0.33 0.33 0.38 0.35 0.40 0.24 0.38 Westpac4 1.17 1.16 0.95 1.24 1.67 1.51 1.57 1.99 Westpac4 0.80 0.69 0.73 0.78 0.73 0.66 0.73 0.69 Average 1.32 0.88 1.22 1.30 1.50 1.90 2.34 1.67 Average 0.67 0.50 0.66 0.86 0.71 0.77 0.74 0.74 Capital Adequacy (%) Impaired Asset Expense/Average Gross Loans and Advances (%) ANZ4, 5 11.20 12.10 12.10 12.70 11.80 12.60 12.50 13.30 ANZ4 -0.07 -0.08 0.07 0.04 0.05 0.07 0.10 0.06 BNZ 12.06 12.13 11.82 12.04 12.28 12.90 12.59 12.67 BNZ 0.11 0.13 0.11 0.12 0.02 0.26 0.10 0.38 CBA + ASB4 11.20 11.20 12.00 11.10 12.70 12.10 12.70 13.30 CBA + ASB4 -0.06 0.09 0.16 0.10 0.29 0.14 0.08 0.09 Heartland Bank 14.73 14.71 14.39 14.09 13.76 13.36 12.86 12.85 Heartland Bank 0.33 0.31 0.46 0.36 0.52 0.44 0.74 0.56 Kiwibank 11.50 11.60 13.00 13.20 13.30 12.40 13.40 12.80 Kiwibank 0.03 0.03 -0.11 0.08 0.16 0.08 0.03 0.08 Southland Building Society 13.69 13.69 15.64 16.02 16.07 15.61 14.59 14.21 Southland Building Society 0.38 0.43 0.51 0.35 0.43 0.79 0.31 0.62 The Co-operative Bank Limited 16.60 16.80 16.80 16.80 16.50 16.50 16.30 16.20 The Co-operative Bank Limited 0.14 0.07 0.07 0.08 0.07 0.05 0.16 0.04 TSB Bank Limited 14.00 14.21 14.77 14.98 13.48 13.85 13.71 15.77 TSB Bank Limited 0.08 0.05 0.11 0.85 6.06 0.04 0.07 -1.47 Westpac4, 5 11.30 12.10 11.70 12.30 11.60 12.10 12.40 13.30 Westpac4 0.08 -0.06 0.01 0.13 0.12 0.07 0.08 0.01 Average 0.01 0.01 0.08 0.10 0.17 0.13 0.09 0.11 Net Profit ($Million) Operating Expenses/Operating Income (%) ANZ4 393 460 390 468 425 452 427 467 ANZ4 41.52 45.40 39.85 37.81 39.02 36.61 38.03 36.34 BNZ 198 195 205 252 232 270 295 241 BNZ 42.91 40.85 41.67 43.07 39.67 32.91 34.47 35.81 CBA + ASB4 232 214 191 227 214 218 212 234 CBA + ASB4 38.78 37.52 38.15 37.66 37.04 37.60 41.19 37.73 Heartland Bank 9 9 10 10 10 11 10 10 Heartland Bank7 53.93 51.35 47.98 49.15 48.13 47.14 48.45 49.94 Kiwibank 26 22 26 35 36 29 27 33 Kiwibank 61.86 68.27 70.19 56.78 54.10 62.07 67.52 59.84 Southland Building Society 4 5 4 6 5 4 6 4 Southland Building Society 64.55 61.20 63.33 62.83 66.27 62.82 60.39 67.73 The Co-operative Bank Limited 2 2 2 2 3 2 2 3 The Co-operative Bank Limited 77.63 83.96 81.97 82.85 77.95 78.63 80.40 77.65 TSB Bank Limited 14 13 16 12 -18 16 13 25 TSB Bank Limited 39.39 42.26 36.91 38.20 37.95 42.72 44.68 42.50 Westpac4 266 230 281 242 244 247 266 249 Westpac4 41.57 40.54 39.64 37.70 38.97 37.89 38.95 43.11 Total 1,144 1,150 1,125 1,254 1,151 1,249 1,259 1,266 Average 42.55 43.26 41.51 40.20 39.98 37.89 39.80 39.52
FIPS 2015 | KPMG | 49
Size & Strength Measures Profitability Measures Entity Entity 31 Dec 13 31 Mar 14 30 Jun 14 30 Sep 14 31 Dec 14 31 Mar 15 30 Jun 15 30 Sep 15 31 Dec 13 31 Mar 14 30 Jun 14 30 Sep 14 31 Dec 14 31 Mar 15 30 Jun 15 30 Sep 15
Total Assets6 ($Million) Interest Margin (%) ANZ4 128,109 129,529 132,422 135,074 135,290 140,253 150,664 152,038 ANZ4 2.35 2.30 2.27 2.32 2.33 2.23 2.21 2.23 BNZ 75,481 76,740 75,845 79,522 79,658 81,926 85,657 86,629 BNZ 2.32 2.30 2.37 2.28 2.28 2.34 2.36 2.30 CBA + ASB4 71,950 72,586 72,077 73,483 74,149 76,994 80,147 81,321 CBA + ASB4 2.26 2.24 2.29 2.40 2.40 2.27 2.21 2.13 Heartland Bank 2,462 2,423 2,368 2,431 2,543 2,623 2,772 2,825 Heartland Bank 4.61 4.45 4.94 4.99 5.06 4.91 4.83 4.81 Kiwibank 16,032 16,344 16,590 16,882 17,064 17,948 18,228 18,686 Kiwibank 1.82 1.82 1.96 2.13 2.17 2.12 2.07 2.13 Southland Building Society 2,806 2,784 2,786 2,825 2,826 2,858 3,094 3,163 Southland Building Society 2.53 2.58 2.81 2.97 2.97 2.93 2.86 2.67 The Co-operative Bank Limited 1,595 1,616 1,664 1,704 1,770 1,795 1,838 1,896 The Co-operative Bank Limited 2.78 2.78 2.85 2.95 2.90 2.80 2.81 2.77 TSB Bank Limited 5,684 5,682 5,655 5,736 5,908 5,908 5,991 6,208 TSB Bank Limited 2.01 1.99 2.17 2.30 2.15 2.20 2.12 2.14 Westpac4 76,807 78,857 80,392 80,963 82,442 82,087 87,455 88,203 Westpac4 2.12 2.14 2.18 2.23 2.28 2.26 2.32 2.28 Total 380,926 386,561 389,799 398,619 401,649 412,392 435,846 440,968 Average 2.27 2.25 2.28 2.32 2.34 2.29 2.28 2.25 Increase in Gross Loans and Advances (%) Non-interest Income/Total Tangible Assets (%) ANZ4 1.81 0.99 1.30 1.31 1.53 1.75 3.60 0.86 ANZ4 0.65 0.31 0.73 1.00 0.79 0.90 0.76 0.80 BNZ 0.69 0.42 1.45 0.93 1.16 1.57 1.01 1.72 BNZ 0.61 0.47 0.53 1.06 0.63 0.94 0.97 0.83 CBA + ASB4 0.92 0.49 0.96 1.87 1.19 2.75 2.04 2.29 CBA + ASB4 0.64 0.59 0.64 0.58 0.63 0.56 0.52 0.66 Heartland Bank -2.96 -0.49 3.77 3.15 4.50 4.10 4.11 3.21 Heartland Bank 0.52 0.63 0.45 0.33 0.41 0.41 0.36 0.39 Kiwibank 3.73 2.87 1.85 0.66 2.20 2.04 1.50 2.24 Kiwibank 0.66 0.77 0.58 0.72 0.73 0.57 0.57 0.59 Southland Building Society 0.62 0.03 -0.53 -0.10 2.88 2.50 11.34 2.71 Southland Building Society 0.74 0.71 0.77 0.93 0.96 1.03 0.98 0.95 The Co-operative Bank Limited 3.83 3.02 2.58 2.74 2.93 2.19 3.24 4.28 The Co-operative Bank Limited 1.30 0.90 1.17 1.14 1.13 0.24 1.00 0.99 TSB Bank Limited 1.31 0.26 0.94 0.20 3.04 1.73 5.27 3.39 TSB Bank Limited 0.32 0.33 0.33 0.38 0.35 0.40 0.24 0.38 Westpac4 1.17 1.16 0.95 1.24 1.67 1.51 1.57 1.99 Westpac4 0.80 0.69 0.73 0.78 0.73 0.66 0.73 0.69 Average 1.32 0.88 1.22 1.30 1.50 1.90 2.34 1.67 Average 0.67 0.50 0.66 0.86 0.71 0.77 0.74 0.74 Capital Adequacy (%) Impaired Asset Expense/Average Gross Loans and Advances (%) ANZ4, 5 11.20 12.10 12.10 12.70 11.80 12.60 12.50 13.30 ANZ4 -0.07 -0.08 0.07 0.04 0.05 0.07 0.10 0.06 BNZ 12.06 12.13 11.82 12.04 12.28 12.90 12.59 12.67 BNZ 0.11 0.13 0.11 0.12 0.02 0.26 0.10 0.38 CBA + ASB4 11.20 11.20 12.00 11.10 12.70 12.10 12.70 13.30 CBA + ASB4 -0.06 0.09 0.16 0.10 0.29 0.14 0.08 0.09 Heartland Bank 14.73 14.71 14.39 14.09 13.76 13.36 12.86 12.85 Heartland Bank 0.33 0.31 0.46 0.36 0.52 0.44 0.74 0.56 Kiwibank 11.50 11.60 13.00 13.20 13.30 12.40 13.40 12.80 Kiwibank 0.03 0.03 -0.11 0.08 0.16 0.08 0.03 0.08 Southland Building Society 13.69 13.69 15.64 16.02 16.07 15.61 14.59 14.21 Southland Building Society 0.38 0.43 0.51 0.35 0.43 0.79 0.31 0.62 The Co-operative Bank Limited 16.60 16.80 16.80 16.80 16.50 16.50 16.30 16.20 The Co-operative Bank Limited 0.14 0.07 0.07 0.08 0.07 0.05 0.16 0.04 TSB Bank Limited 14.00 14.21 14.77 14.98 13.48 13.85 13.71 15.77 TSB Bank Limited 0.08 0.05 0.11 0.85 6.06 0.04 0.07 -1.47 Westpac4, 5 11.30 12.10 11.70 12.30 11.60 12.10 12.40 13.30 Westpac4 0.08 -0.06 0.01 0.13 0.12 0.07 0.08 0.01 Average 0.01 0.01 0.08 0.10 0.17 0.13 0.09 0.11 Net Profit ($Million) Operating Expenses/Operating Income (%) ANZ4 393 460 390 468 425 452 427 467 ANZ4 41.52 45.40 39.85 37.81 39.02 36.61 38.03 36.34 BNZ 198 195 205 252 232 270 295 241 BNZ 42.91 40.85 41.67 43.07 39.67 32.91 34.47 35.81 CBA + ASB4 232 214 191 227 214 218 212 234 CBA + ASB4 38.78 37.52 38.15 37.66 37.04 37.60 41.19 37.73 Heartland Bank 9 9 10 10 10 11 10 10 Heartland Bank7 53.93 51.35 47.98 49.15 48.13 47.14 48.45 49.94 Kiwibank 26 22 26 35 36 29 27 33 Kiwibank 61.86 68.27 70.19 56.78 54.10 62.07 67.52 59.84 Southland Building Society 4 5 4 6 5 4 6 4 Southland Building Society 64.55 61.20 63.33 62.83 66.27 62.82 60.39 67.73 The Co-operative Bank Limited 2 2 2 2 3 2 2 3 The Co-operative Bank Limited 77.63 83.96 81.97 82.85 77.95 78.63 80.40 77.65 TSB Bank Limited 14 13 16 12 -18 16 13 25 TSB Bank Limited 39.39 42.26 36.91 38.20 37.95 42.72 44.68 42.50 Westpac4 266 230 281 242 244 247 266 249 Westpac4 41.57 40.54 39.64 37.70 38.97 37.89 38.95 43.11 Total 1,144 1,150 1,125 1,254 1,151 1,249 1,259 1,266 Average 42.55 43.26 41.51 40.20 39.98 37.89 39.80 39.52 50 | KPMG | FIPS 2015
$MILLION MAJOR BANKS: NET PROFIT 27 500 450
400
350
300
250
ANZ 200 BNZ 150 CBA + ASB 100 KIWIBANK WESTPAC 50 0 DEC 13 MAR 14 JUN 14 SEP 14 DEC 14 MAR 15 JUN 15 SEP 15
% MAJOR BANKS: INTEREST 2.5 28 MARGIN 2.4
2.3
2.2
2.1 ANZ 2.0 BNZ CBA + ASB 1.9 KIWIBANK 1.8 WESTPAC 1.7 DEC 13 MAR 14 JUN 14 SEP 14 DEC 14 MAR 15 JUN 15 SEP 15
% MAJOR BANKS: INCREASE 4.0 29 IN GROSS LOANS AND ADVANCES 3.5
3.0
2.5
2.0 ANZ 1.5 BNZ CBA + ASB 1.0 KIWIBANK 0.5 WESTPAC 0.0 DEC 13 MAR 14 JUN 14 SEP 14 DEC 14 MAR 15 JUN 15 SEP 15 FIPS 2015 | KPMG | 51
% MAJOR BANKS: NON- 1.2 30 INTEREST INCOME/AVERAGE TOTAL ASSETS 1.0
0.8
0.6 ANZ BNZ 0.4 CBA + ASB KIWIBANK 0.2 WESTPAC 0.0 DEC 13 MAR 14 JUN 14 SEP 14 DEC 14 MAR 15 JUN 15 SEP 15
% MAJOR BANKS: OPERATING 80 31 EXPENSES/OPERATING INCOME 75 70
65
60 55
ANZ 50 BNZ 45 CBA + ASB 40 KIWIBANK WESTPAC 35 30 DEC 13 MAR 14 JUN 14 SEP 14 DEC 14 MAR 15 JUN 15 SEP 15
% MAJOR BANKS: IMPAIRED 0.5 32 ASSET EXPENSE/AVERAGE GROSS LOANS AND 0.4 ADVANCES 0.3
0.2
ANZ 0.1 BNZ 0.0 CBA + ASB KIWIBANK -0.1 WESTPAC -0.2 DEC 13 MAR 14 JUN 14 SEP 14 DEC 14 MAR 15 JUN 15 SEP 15 52 | KPMG | FIPS 2015 Moving beyond disclosure to put conduct at the top of your priorities
New Zealand has come a long way in the regulation of financial services The implementation of the in a relatively short space of time. Financial Markets Conduct Previously the focus in the regulation of financial product offers was (FMC) Act has given the on disclosure, with an underlying financial services industry an assumption that if all information was opportunity to up its game, made available then ’we’d be alright‘. On the basis of exhaustive disclosure, and to focus on conduct that firms felt they were doing what they has good customer outcomes needed to do to comply, and investors had what they needed to make an as its objective. informed decision. It proved not to be the case. The old Securities Act regime ignored the way in which behaviour – conduct Liam Mason – is critical to the way financial services Director of Regulation are delivered. It didn’t recognise Financial Markets Authority how, or even whether, investors use ’disclose it all‘ documents. More importantly it didn’t recognise how the broader behaviour of firms can influence and affect investor decisions and outcomes. The FMC Act quite rightly sets a clear direction for improving the accessibility and readability of financial product Liam leads and oversees the disclosures, but it’s only part of the licensing and supervision of all battle. Learning the lessons from the financial markets participants, past – from here and from overseas from individual Authorised – the new regime focuses on the Financial Advisors through conduct of firms. The new FMC Act to KiwiSaver providers. He is is about clear, concise and effective also responsible for the FMA’s disclosure plus conduct. compliance frameworks, contacts, and intelligence As well as bringing a new focus for functions. the regulator, the new regime gives us new tools such as licensing, to ensure Liam has extensive experience we can effectively raise standards in securities law and corporate and increase consumer confidence governance matters, advising in the conduct of providers. The on securities and financial biggest group of newly-licensed firms services law and policy, will include members of almost all Crown entity governance and banking groups – investment scheme legal compliance. managers. These new licences come with specific duties – to act honestly, not to misuse information and to FIPS 2015 | KPMG | 53
act in the interests of customers But while systems and processes are ’walking the talk‘, and can show how or investors. necessary for good conduct, they are business practices have customer not sufficient. Good conduct is also interests at their core. We initially assess whether firms strongly influenced by organisational meet minimum standards, which often At the coalface, our thematic review of culture. However robust, processes leads to improvements in many firms. KiwiSaver sales and advice practices and controls can be exploited by More importantly, licensing gives us last year pointed to a willingness to behaviour if the culture is wrong. So, a closer, continuous relationship with grasp the spirit of the new regime rules and controls plus conduct drive you as financial providers and the from most players. However, in what actually happens and what the ability to set our expectations early practice many were also struggling customer experiences. and work with you to fix issues before with how to make the changes needed problems become serious. That’s how to bring this about. We found a lack of we want to raise standards – working But culture is hard to define and comprehensive governance systems collaboratively with the industry. even harder to regulate. enforcing the right culture in sales and advice practices. More importantly, In our Strategic Risk Outlook (SRO)8 given the strong behavioural aspect we gave very clear guidance as to of the new regime, there was a what we believe are the main risks to For a regulator, a risk management disappointing lack of reporting to fair, efficient and transparent financial tool or a governance structure is visible senior management on sales and markets. As a risk-based regulator, we and can be tested and benchmarked. advice practices and outcomes, and published the SRO to show where But culture is hard to define and even inconsistent attention to managing we’ll focus our resources through the harder to regulate. As such we do conflicts of interest. transition to the FMC Act– and why. not presume to ‘dictate’ a required culture. We do know, however, that We accept there are challenges for example and consequence are critical firms to meet our expectations and Put simply, this is about having influences on culture. People need to the intentions of the FMC Act, and systems and processes that look see examples from their colleagues that good conduct varies enormously for actual incidents of – and the and their leaders for a sense of depending on the circumstances, and potential for – poor customer whether conduct expectations are we will do our part to enable firms to outcomes and identify and address real, or just rhetoric. Good conduct is meet the new licensing requirements, the causes. taken seriously when there are clear which become effective 1 December. consequences if expectations are To get every licence application not met. through, it is up to the industry to That means providers must be able From the insights we’ve gained engage with us to ensure we can work to demonstrate how they go about through supervising and monitoring through any particular questions or identifying and managing conduct risk in the last few years we know that if issues with individual firms. within their business and how they we are going to see real emphasis on know that their conduct is appropriate. The licensing of the managed achieving good customer outcomes, Put simply, this is about having investment schemes in particular is a then good conduct needs to be systems and processes that look for key priority for the FMA this year and embedded in the DNA of the firm. actual incidents of – and the potential it is a substantial part of the functional for – poor customer outcomes and That is why we have made it clear operation of the new regime. High identify and address the causes. If that setting the right ‘tone at the top’ standards of conduct are critical to the customers are treated unfairly, or if is crucial and that directors and senior reputation and success of our financial products or services produce poor management are responsible for markets, and we believe will build a outcomes for customers, that can assessing conduct against business stronger industry and deliver better damage the reputation of a firm, and customer outcomes. The FMA outcomes for customers. and have the potential for significant will also be assessing whether a firm’s regulatory intervention. board and senior management are 54 | KPMG | FIPS 2015
Conduct and culture: at home and away
Away: What’s topical up of the Financial Conduct Authority’s there? (FCA’s) latest market study on credit Off the back of the huge focus cards, while also managing risks in Practically at banks by global regulators over the chat forums post the publication of chat room transcripts as part of LIBOR last ten years on restoring At a risk conference in Europe in December 2015, conduct issues were manipulation investigations. trust in banking, consumer still at the very top of the Chief Risk Officer’s (CRO’s) and CEO’s agenda. protection and market This emphasis on conduct being But the discussion has evolved from at the heart of the business integrity, the term conduct risk being purely focused on the external has refocused attention on the finally arrived in New Zealand conduct agenda and outcomes for conduct aspects of the bank’s consumers and markets, to being in 2015. New Zealand overall strategy. more internally focused on cultural regulators are in the throes change at banks. There was a lot of of looking at higher risk discussion in particular around the Longer term however, there seems market studies focusing on bank areas and most New Zealand to be an increasing realisation that culture. Post the GFC a huge amount driving appropriate conduct in banking financial institutions are of literature was published by think needs to be a long-term sustainable tanks, global regulatory bodies and kicking off programmes of process led from the top and involving individual banks to understand what work around conduct risks all parts of the bank, not a siloed piece happened in the GFC, looking for of work led by Risk. Naturally this and culture assessments. ways to protect both the market emphasis on conduct being at the and consumer in the future. The heart of the business has refocused At the same time as these most recent of these is a report attention on the conduct aspects of published in July 2015 by the Group programmes of work are the bank’s overall strategy. It is also of Thirty (G30) called ’Banking driving banks and regulators to look getting underway, the Conduct and Culture‘. The report at the foundations of who and how ground is moving beneath calls for a sustained focus on strategy is executed in the bank conduct and culture. In their view, our feet; the thinking of through its core values and culture. The “culture and repairing trust go hand bank’s growth strategy needs to be global regulators and global in hand and are a prerequisite for aligned with the conduct agenda and sustainable economic returns and financial institutions is ultimately the customers’ interests. – in the medium term – a source of evolving and changing as fast For example: competitive advantage”. as New Zealand works hard • where one aspect of strategy could Day to day, it is increasingly challenging be a focus on fintech (see page 68) to catch up. In this article we for banks to balance execution and and innovation to drive agility and remain current with these ever- highlight some of the topical speed of execution, the complex changing publications; banks are areas that you should be and unexpected customer impacts responding to regulators, market and which could materialise as a result thinking about both globally media demands and actually driving of implementation must be treated cultural change, while at the same and closer to home. with the same importance; time actively trying to be on top of every new piece of theory or thematic • another example is balancing the analysis published. For example, need to improve ROE and take cost several banks had project teams out whilst ensuring the customer reviewing the G30 report, while at experience is improved at the same the same time looking at the findings time; or FIPS 2015 | KPMG | 55
• when pursuing digital strategies financial industry” at a conference in ensuring that as much emphasis November 2015. is placed on middle and back There seems to have been a office systems such as payments, Ceri Horwill noticeable shift with EU regulators which support overall delivery to a Partner – Advisory towards thematic reviews of specific customer, as on as glossy front end KPMG industry concerns e.g. credit cards customer interfaces. and payday lenders, as well as looking Overall it’s about rebalancing the at conduct risks to market integrity historic focus on rewarding employees as a whole rather than consumer and increasing shareholder value with protection in isolation. The FCA Ceri is a specialist in financial an equal focus on value to customers has also recently introduced the services advisory, accounting and impact on society. Senior Managers Regime which, for for financial services businesses the first time, formally introduces and financial services regulation. And at the regulators… accountability at the CEO level for Using her detailed knowledge of the industry combined with The regulators’ approach to conduct leading, implementing and challenging cultural change and has therefore her technical, regulatory and risk risk has also evolved and is following management experience, Ceri has a similar journey of refocusing on given regulators a remit to review the bank’s governance and cultural values. a strong ability to understand the evaluating the culture and governance business impacts of accounting at banks. Recognising that they form However, although the FCA is and regulatory change. the foundation for the success, or emphasising the importance of culture failure, of conduct initiatives as well as in the banking industry, over Christmas Ceri is the leader of KPMG market integrity. it was decided not to complete a New Zealand’s Financial and Regulatory Risk Management For example, the Dutch Central Bank thematic review of culture over UK banks as a whole. Instead to work practice. She provides regulatory, has been reviewing and investigating risk, accounting and compliance behaviour at banks and the with each of the banks individually to promote cultural change in banking, advice for financial services effectiveness of a bank’s board using clients. Ceri has a deep and a team of specialists with psychology, rather than complete an industry-wide review. The FCA is also looking at detailed knowledge of financial governance and change backgrounds. products, financial services Similarly, other governments are some new and innovative approaches to regulation as part of their objective businesses and financial risk using these types of skills to inform and a strong ability to explain policy. The UK Government’s to promote “competition in the interests of consumers”. By adopting complicated concepts in programme of using Nudge theory simple and easy to understand and behavioural economics has been this strategy the objective is to “shape [our] approach to competition around language. She is responsible for so successful that it has been spun leading KPMG’s roll out of some off into a commercial venture in its the benefits for consumers, which includes better value, genuine choice, of the complex new accounting, own right. The FCA is employing regulatory and capital similar techniques; for example, the quality products and services, and useful innovation in financial services”. requirements which will impact payday lending market where they the financial services industry are highlighting borrowers “present One part of this strategy is to look at ways of supporting the development over the next few years (IFRS 9, bias” or the propensity for optimism Capital Requirements, FATCA, about their future behaviour. Even of new innovations and disruptors in the market which might be beneficial AML etc.) and frequently presents institutions such as the International on these topics. Monetary Fund (IMF) have a view to consumers and making sure on banking culture with Managing those businesses have access to Director, Christine Lagarde calling the regulator, essentially providing for a “culture of greater virtue and safe environments or ’regulatory integrity at the individual level in the sandboxes‘ in which to test new ideas. 56 | KPMG | FIPS 2015
At the same time as European market from those reviews are being fed up is and why it matters, what good regulators are shifting towards the into the overall programme. culture looks like and how they plan importance of culture, prudential to address poor culture. Particularly Australian banks, by contrast, have regulators are catching up on conduct relevant for New Zealand banks is his been working on conduct risk agendas risk and considering whether a bank encouragement to banks to not wait for several years now and over the last should be holding capital against for the regulator to look over their couple of years have been starting conduct risk as a separate category shoulder, but to initiate taking action to to migrate into cultural reviews and within operational risk. This has led address culture themselves. He also cultural change programmes. Typically to consultation papers around the warned of the dangers of complacency the conduct risk projects would start measurement of conduct risk as a on the risks that haven’t happened yet with a review of risk areas which had Pillar 2 risk and a refocus of the Pillar 2 and thinking once about culture and been raised by regulators overseas supervisory review and evaluation then “ticking that box as ‘done’”. and how they applied to their local process (SREP) to include conduct business. These gave them a sound APRA, Australia’s prudential regulator, and culture within the qualitative starting point for assessing the has also warned that it is monitoring assessments regulators are making. conduct risks in the business, however culture. In their view “strengthening The European Banking Authority (EBA) over the last year regulators have culture, like strengthening capital, has also announced plans for its 2016 also started to voice wider concern is critical to long-run stability”. EU-wide stress test and for the first over culture in Australian banks. This Although they acknowledge that time conduct risk will be included has been coupled with research you can not regulate culture, they using banks own estimates of profit or published by Macquarie University, have emphasised that culture is loss impacts of conduct related fines. based on employee surveys, which particularly important to risk through also raised concerns about the risk the introduction of CPS 220 ‘Risk Home: What’s going on culture in Australian banks. These have Management’ and its requirement for down closer to home? prompted significant debate about “a sound risk management culture Practically at banks the interaction of conduct risk, risk to be established and maintained culture and overall banking culture in throughout an organisation”. New Zealand banks have started Australian banks, whether culture can New Zealand banks forming part of an their conduct risk and culture projects be “regulated” and how culture can be Australian group will also need to meet several years later than global banks. measured and changed. these requirements. In the early stages these reviews have tended to be piecemeal across And at the regulators… Closer to home, conduct risk and all three lines of defence and often culture has also firmly arrived on the The Australian Securities and not joined up. The findings were also FMA’s agenda. In its Strategic Risk Investments Commission (ASIC), hard connect to wider conduct risk Outlook document for 2015 it states as the Australian conduct regulator, strategies or programmes and were that “for financial services firms, has called out poor culture as a key often restricted to “mis-selling risk” embedding a strong culture that puts factor that can undermine trust and rather than thinking about conduct risk customer interests at the heart of the confidence in the financial system more holistically across the whole of business is crucial to ensuring conduct and “is a key driver of conduct within the product lifecycle. that benefits both the business and the financial services industry”. They consumers”. They have also actively New Zealand banks however do have stated in their Enforcement Outcomes started reviews of sales incentives, to start somewhere in what will likely report for the six months to June 2015 marketing and distribution of certain be a long journey to changing conduct that they “are planning to incorporate products, commission structures and and embedding cultural change. It examinations of culture into their switching practices amongst others. will be important for Bank’s that have reviews focussing on (a) incorporating started a conduct risk programme not an examination of culture into our More pervasively however, the new to lose the learnings from those early risk-based surveillance reviews; (b) Financial Markets Conduct regime has reviews and to join up all findings into using the surveillance findings to come into force and going forward will wider themes and programmes of better understand how culture is be a key tool for the FMA to assess work. It will be important to also think driving conduct among our regulated the conduct and culture at banks. laterally about the findings from those population; and (c) addressing the The headlines around the regime reviews. Where conduct risks have issue directly with entities when have primarily focussed on the hard been identified in a specific area of the we see a problem with their culture deadlines, the licensing requirements bank, taking the time to identify where and conduct”. and the new disclosure requirements. similar conditions, approaches or risks However, much more important in our This message has subsequently might exist in other parts of the bank. view are the clear messages around been frequently reinforced in their Similarly on routine second or third line the FMA’s expectations of firms’ publications and speeches including a reviews, ensuring that conduct risks culture and conduct and how critical speech by Greg Medcraft in November are being considered and the findings those are to the robustness of our 2015 which discussed what culture FIPS 2015 | KPMG | 57
financial markets. The emphasis has the bank: from top to bottom, from we also need to be conscious of the shifted from ’buyer beware‘ to ’seller strategy to underlying processes, extraordinary impact of change driven beware‘. The FMA is not only expecting systems and infrastructure. It’s not just by conduct and cultural focus that is good behaviour, culture and conduct the front office getting it right, but the going on in the rest of the world and at firms, but is also increasingly tone from the top resonating through prepare ourselves for those changes in expecting firms to be able to actively the way the whole firm goes about New Zealand. New Zealand has got a demonstrate how they achieve those. doing business. lot to learn from the rest of the world Their messages are not just around in this space, but we are also actively New Zealand banks are starting to identifying pockets of poor behaviour facing the challenges of getting it right face into the challenges of conduct or rogue incidents, but are recognising and seizing the opportunity to serve risk and setting a firm foundation for that a culture of protecting consumer customer outcomes better. trust in our financial markets, but and market outcomes is critical across 58 | KPMG | FIPS 2015
Resilient banks, a resilient economy
A world-class banking system Over the past year New Zealand has established a New Zealand’s economy has well-capitalised, world-class banking faced numerous challenges – system, and is known to be one of the dairy prices fell, commodity most competitive globally. As outlined in the RBNZ’s Financial Stability Report prices decreased, growth in (November 2015), our banks are well- China slowed, and the housing funded with capital and liquid assets market remained constrained well above regulatory requirements. as demand continued While the IMF in its November 2015 report noted a challenging outlook to outstrip supply – yet for New Zealand’s economy, it New Zealand’s banking sector acknowledged New Zealand remains remains stable. How have resilient due in part to banks being well-capitalised and employing stress Antony Buick-Constable our banks remained resilient Acting Chief Executive, Policy tests to help ensure the sector can Director and Legal Counsel while facing risk in global and withstand volatility in housing, trade New Zealand Bankers’ Association and economic markets, and that banks local environments? continue supporting the agricultural sector as it faces lowering prices. New Zealand’s banks have remained stable and self-sufficient against the stresses or fluctuations in the global environment. This was evident during the GFC, and more recently the Antony is responsible for leading Greek debt crisis and slowdown in advocacy on key issues affecting China’s economy. the banking industry, including policy, legislative and regulatory The competitiveness of our market has processes. been noted by the World Economic Forum, which ranked New Zealand Antony joined the New Zealand first in financial market development Bankers’ Association in July in its Global Competitive Report 2015. Previously he held senior 2015–16. This ranking recognises that positions as part of the in- our financial markets can make capital house legal team at Bank of available to private sector investment New Zealand and the banking from sources such as bank loans and and finance team at Minter well-regulated securities exchanges Ellison Rudd Watts. Antony is a in order to contribute to business qualified barrister and solicitor. investment, which is critical to broader economic productivity. The soundness of New Zealand’s banks continues to rank highly (fourth out of 140 countries), and New Zealand leads the world in terms of trustworthiness and confidence in the banking sector – an FIPS 2015 | KPMG | 59
enviable reputation. The strength of our committed to working constructively Banks thinking global, acting banks means they can access funding with government and regulators to local at good rates, and the benefits of this help ensure the best outcomes can At a local level the banking sector can be passed onto New Zealanders. be achieved. As an industry we are recognises it’s as much about working very focused on playing our part with customers as it is working for toward maintaining a stable banking Managing risk with a customers. Managing relationships long‑term view environment. is very much a part of managing Since the GFC there has been a The challenges that banks have faced risk. Contributing to and building renewed focus on ensuring risks following the GFC have not been relationships with communities and are minimised within our banking insignificant. The wholesale funding customers is important. industry. Our banks invest significantly markets remain volatile and there It is critical for banks to understand in best practice governance, risk have been numerous legislative and their customers’ industries to assist management, portfolio management, regulatory changes. Our banks are with responding effectively to their business continuity planning and committed to complying with their needs and issues. Some industries are infrastructure. Ongoing investment domestic and international obligations more vulnerable to fluctuations than in technology and cybersecurity as registered banks. Doing so has others. This means banks focus on helps ensure our bank systems and required substantial investment continuing close working relationships customers are well-protected against and resources to be expended with their customers. For example, potential threats of cybercrime. This on implementing these changes, in recognising the importance of long-term view and investment is which have included the Anti-Money agribusiness to the economy, banks also a commitment to maintaining a Laundering and Countering Financing are committed to supporting and sustainable and successful banking of Terrorism Act 2009, United States working with farmers during the good sector in New Zealand. Foreign Account Tax Compliance Act times and bad times. (FATCA), and the RBNZ’s requirements Banks understand the importance of Banks are an essential part of for banks to hold increased capital and long term thinking and are focused local communities. This is evident restrictions on LVRs. on striking the right balance between through being a significant employer, lending and growth on the one hand, A key benefit of a stable banking purchasing a range of local goods and and prudence on the other. For environment is that banks can continue services, and playing an active role in many New Zealanders this presents to invest in New Zealand. communities through sponsorship and the opportunity to save for a more volunteer projects. In 2015, banks directly contributed secure future through personal saving $6.9 billion to the New Zealand Our banks have weathered the last and investment in KiwiSaver, with economy. That’s made up of the few years of global financial turmoil banks being able to offer a range of $4.9 billion cost of running their well. They are among the best investment options, competitive fees businesses here, which includes capitalised and reputed banks in the and investment capability. employing around 25,000 people and world – that’s good for us and the economy. This also means our banks Playing our part for a purchasing goods and services from businesses across New Zealand. In are well placed to meet the global and local challenges ahead. stable economy addition to that operational expenditure, New Zealand’s regulated banking banks paid $2 billion in tax. A stable and resilient banking system system supports a flexible economy helps underpin a resilient economy. A stable banking sector contributes to a and is respected globally. Its Mitigating and managing risk to stable and sustainable economy. On a effectiveness is contributed to maintain its resilience is a banking personal level banks allow us to finance by government and the banking sector responsibility, one that is not sector working in a coordinated and our homes, buy products, and grow our taken lightly. consultative way to achieve a balance savings. They also support domestic of policy and prudence through quality businesses and export businesses regulation. The banking sector is to grow. 60 | KPMG | FIPS 2015
LOW INTEREST Godfrey Boyce National Managing Partner – Advisory KPMG RATE Godfrey is National Managing Partner of KPMG’s Advisory practice. He leads KPMG’s Financial Services advisory practice in New Zealand. Godfrey ENVIRONMENT – has over 30 years of audit and advisory experience across a range of KPMG clients in Australia, Canada, New Zealand and the United Kingdom. He has AN EARNINGS wide business experience with a particular emphasis on banking, investment and corporate treasury operations. CHALLENGE FOR BANKS IN 2016 FIPS 2015 | KPMG | 61
An inherent part of the asset liability management challenge faced by all banks is the decisions they make in terms of investing free funds – that is non-interest bearing (NIB) liabilities and their equity. The decisions made by New Zealand’s registered banks will come into focus in 2016 in a period of historically low interest rates. The current easing cycle initiated by the RBNZ began in June 2015 when the OCR was reduced from 3.5% to 3.25%. The most recent OCR change was on 10 December 2015 when the OCR was reduced to its previous lowest level of 2.5%. 62 | KPMG | FIPS 2015
The market has been expecting further cuts in the OCR potentially down to as low as 2%. The current pricing in OVERNIGHT INDEX SWAPS the Overnight Indexed Swap (OIS) 33 rate market supports this view (see Figure 33). However in a recent speech the RBNZ Governor hosed down OVERNIGHT INDEX SWAP RATE % expectations for further OCR cuts. 2.55
2.50 In a recent speech the RBNZ Governor hosed down expectations 2.45 for further OCR cuts.
2.40 The RBNZ sees downside risks to the OCR outlook, but mainly from 2.35 downside global risks, rather than perceived downside risks to domestic 2.30 inflation pressures. The market is still expecting the RBNZ to eventually cut 2.25 the OCR, but the speech makes it OCR 123456912 clear the hurdle for a cut in the near term is high. SWAP DURATION
SOURCE: RESERVE BANK OF NEW ZEALAND STATISTICS 33 SEE FIGURE 33 – PAGE 62 The interest rate re-pricing information The free funds of the four largest • presented by each of the nine banks banking groups were $48.7 billion Nonetheless the OCR has fallen a full we report on each quarter enables us and therefore the potential impact 1% over the last six months of 2015 to estimate each bank’s free funds on income of a 1% reduction on with a similar impact on the pricing and therefore the potential impact those funds would be $487 million (or of the banks’ assets and liabilities. on earnings were all the free funds $508 million for the registered banks This might imply no net impact on invested to immediately earn 1% less on a stand-alone basis). This would the banks’ earnings, but non-interest return. We estimated (using the most have been a significant amount in bearing liabilities and equity do not re- recent annual financial statements the context of each bank’s reported price and so the return on those funds available) that the non-interest earnings in 2015 (an average of 8% of is reduced to the extent the related bearing liability for the nine banks pre-tax profit). assets they have been invested in was $20.8 billion and the equity was However, this high level analysis do re-price. $31.7 billion. The impact of a 1% ignores the fact that the assets in decrease in the return on these free which each bank’s free funds are funds would be $525 million. The free funds of the four largest invested will not re-price immediately. banking groups was $48.7 billion. This is because most banks have policies that determine a benchmark or target duration over which free funds are invested. A representative FIPS 2015 | KPMG | 63
Two questions for each bank’s ALCO TABLE 9: Interest Rate Risk Sensitivity Analysis Committee to address over the $Million Profit 1% Reduction in Interest Rates Over a coming months are: Before One-Year Horizon 1. What assumptions do we make Tax Potential Potential Disclosed regarding the period in which the current low interest rates will Impact on Impact on Sensitivity remain in place? Free Funds Free Funds (Parallel (Fully re- (1/3 re- Shift) 2. Do we change our benchmark duration for the investment of prices) prices) free funds? ANZ Bank New Zealand Limited 2,464 -201 -67 -49 Regardless of the conclusions ASB Bank Limited 1,192 -96 -32 -36 reached, banks will be faced with a lower earnings contribution on their Bank of New Zealand 1,439 -107 -36 n/a free funds in 2016 which will slow the earnings growth the industry might Westpac New Zealand Limited 1,254 -104 -35 n/a have otherwise expected from their n/a = not available anticipated balance sheet growth. Taken with the other potential impacts on earnings over the next 12 months, assumption might be that free funds bank’s capital to its agreed benchmark including the amortisation of mortgage are invested so that they re-price duration. Banks provide a range of acquisition costs and increased credit evenly over a three-year horizon. If disclosures in relation to this activity. provisioning, there are some clear we apply this assumption, then the If the reported interest rate sensitivity earnings challenges for New Zealand’s potential impact in 2016 of a 1% gaps of the four largest registered banks in 2016. decrease on free funds reduces to banks are aggregated the re-pricing $170 million. picture is seen in Table 10. Of course the interest rate risk on As expected this confirms that the each bank’s free funds is not managed largest percentage of the balance in isolation. Rather it is managed as sheet re-prices within the 12 months part of each bank’s structural interest following the respective balance dates rate risk exposure (non-traded market of these banks. While this position is risk) with a normal objective being to likely to have changed to some degree help ensure the reasonable stability since each of the banks’ balance dates, of net interest income over time. The and interest rate risk management Treasury unit of each bank manages actions will have been taken, there will the structural interest rate mismatch still be a significant re-pricing impact associated with a transfer-priced in 2016. balance sheet, including managing the
TABLE 10: Big 4 Aggregated Interest Rate Sensitivity Gap Re-pricing Period 0 to 1 Year 1 to 2 Years Greater Than 2 Years % of Total Net Gap (including derivatives and excluding NIB) 47% 27% 26% 64 | KPMG | FIPS 2015 THERE IS NO OTHER CHOICE BUT TO INVEST IN THE FUTURE
Ian Proudfoot Partner – Audit Global Head of Agribusiness KPMG
Ian joined KPMG in London in 1992 transferring to the New Zealand firm in 1996. Ian is the leader of KPMG’s Agribusiness group in New Zealand, and Global Head of Agribusiness for the firm. He is author of the KPMG Agribusiness Agenda, a publication that, since 2010, has addressed the industry opportunities and challenges in New Zealand. Since the publication of the KPMG Agribusiness Agenda, Ian has presented to numerous companies and industry groups on the strategic challenges facing New Zealand’s primary industries. He is currently researching KPMG’s Agribusiness Agenda for 2016. FIPS 2015 | KPMG | 65
The media have adopted the dairy industry, or more specifically, the Global Dairy Trade (GDT) auction results, as their proxy for the success or otherwise of the New Zealand primary sector. The last year has seen journalists increasingly hone in on the bi-weekly price movements of the limited range of dairy commodity products sold through the GDT platform (often in declining quantities) as a key bellweather for the economic wellbeing of farmers and the wider New Zealand economy. As a consequence they have largely painted an increasingly black picture during the year. 66 | KPMG | FIPS 2015
There is no doubt dairy farmers are thirty years of quota management, work to be done to get to know these facing strong headwinds that have corn prices were falling reducing consumers and to enable us to deliver proved more persistent than many the cost of US production, political the dairy products and solutions commentators expected, but if you disputes saw Russia close its borders they need to fit within their modern are prepared to look beyond dairy the to exports and China in particular lifestyles. This requires the industry primary sector trends are significantly focused on building its domestic to think carefully about the products more optimistic. The kiwifruit industry industry. Many of the conversions, it supplies the market and invest, not has continued its rapid recovery from funded by easily accessible and only in the stainless steel needed to the decimation of the Psa disease, historically cheap debt, were process the milk, but the branding, beef farmers have seen demand and undertaken on the premise of a new innovation and consumer experiences prices hold up during the year, the normal for dairy prices and did not that differentiate our products and wine sector has recorded yet another have the ability to break even at a milk secure a premium. record for the value of exports and price over $8 per kg/MS. At current To me, the key development over the there are positive growth stories in price levels there is no question that last year has not been the shifts in the honey, pipfruit and fishing sectors many of these high cost systems will dairy pricing, but the clear emergence amongst others. struggle to survive. of some really disruptive thinking and technology into agriculture across The dairy sector is in part a victim It is likely that current lower prices the world and the dairy sector is not of its own success. may be prove to be a long-term immune from this disruption. benefit. Two examples standout as providing strong indicators that we need to take The beauty of New Zealand’s primary heed of; we have seen Coca-Cola sector is its diversity; we provide a Given the commodity nature of enter the dairy sector through an basket of premium food and beverage, the market, when supply exceeds investment in Fairlife, a dairy company fibre and timber products to the world, demand prices must fall and they based in the Midwest of the USA, yet the wider community has been have, leaving producing regions with a message from Coke that they conditioned to largely measure the staring each other down over who see the high protein, low lactose, low sector’s contribution to the economy will cut their production to rebalance sugar dairy beverages Fairlife produces on the basis of a single metric, dairy the market. However, the news is as significant future source of growth prices. Depressed prices over the not entirely bad; indicators suggest for their business as it refocuses last two years have raised questions that consumer demand for dairy has towards health and nutrition. This move over the economic viability of some continued its growth trajectory over highlights a trend we are observing dairy farmers, and resulting media the last couple of years suggesting globally that consumers will pay a commentary has raised concerns for the long-term protein demand story premium for formulated beverages many that intense financial pressure remains relevant. that deliver proven health benefits. will impact the decisions farmers make It is likely that current lower prices It also highlights that consumer surrounding their natural environment, may prove to be a long-term benefit; innovation and premium pricing is their livestock and their own health cheaper milk now enables more being attached to liquid dairy products and safety. people to afford to try dairy products, rather than powders, a particularly The dairy sector is in part a victim of its building a deeper base of potential strong trend in Asian markets as fresh own success; the apparently endless consumers to sell to in the future. water supplies become ever more demand for milk from emerging However, their ongoing purchasing constrained. Asian economies accelerated farm cannot be guaranteed as prices We have seen also venture capital conversions to dairy and boosted recover (as they undoubtedly will; investment being directed into New Zealand’s production volumes. supply will be curtailed if farmers are companies looking to create This occurred at the same time as losing money) and the dairy sector will alternatives to animal protein; Europe was unleashing itself from need to earn their loyalty. There is hard companies like Mufri, which is focused FIPS 2015 | KPMG | 67
on developing an alternative dairy digital technology, is ripe for disruption. our products need to stand out in a protein; Hampton Creek Foods, who It is interesting that many of these crowded marketplace to command are looking to synthesise eggs; and investors are coming to agriculture a premium. Our products need to be Impossible Foods and Beyond Meat, with a view of not only making money the food, fibre and timber equivalents who are creating alternative forms but improving environmental and of a Louis Vuitton handbag or an of meat protein. All these entities social outcomes from agriculture; Apple iPhone. It is the provenance, highlight their comparatively small they are looking to bring innovation innovation, branding and experience environmental footprint, their ability to to the market that enables farmers that we deliver that will determine eliminate animal welfare issues and around the world to produce more whether the primary sector prospers. the health attributes of their products (in response to malnutrition and as competitive advantages over poverty) while having a reduced natural protein. environmental impact. There is no other choice but to invest in the future.
We have seen also venture capital In the long-term the cost of doing investment being directed into nothing is likely to be immeasurably New Zealand has benefited companies looking to create greater. significantly over the decades from alternatives to animal protein. having an innovative primary sector and strong recognition as a ‘clean, Innovation is arriving on many fronts; green’ country which has generated While many of these alternative sensors and data analysis are being export earnings and wealth to support products remain some years away integrated into farming systems, the standard of living expected in a from commercialisation, we cannot drones are being utilised to collect developed country. However, what has ignore the disruption that is coming data and manage wide acre properties, delivered success in the past will not to the global agri-food system or water is being managed through be sufficient to secure future success underestimate the pace at which the precision irrigation, biological gain in our dynamic and rapidly changing change is going to be adopted. The is being derived through genetic world, making it critical that the wool sector choose inaction when enhancement and the adoption of primary sector invests in innovation faced with the competitive threat biological control technologies, as well and technology to secure its future. posed by synthetically produced as farmers having the opportunity Many of the good news stories from carpets. The industry was ultimately to connect directly with their the primary sector are a result of left with an immaterial share of the customers. Innovation will transform companies responding to rapidly global carpet market and decades of the global agri-food system as we changing markets, moving swiftly, low returns, as consumers voted with have historically known it; adopting innovating with their products their wallets for cheaper synthetic these technologies will come with a and the solutions they deliver to products. We need to learn from wool cost, however in the long-term the consumers around the world. Despite farmers’ experience and invest today cost of doing nothing is likely to be the headwinds, now is the time to to build and protect a market position immeasurably greater. boldly invest in the innovation that as the world’s leading producer of New Zealand will only ever be a small will differentiate our products in the innovative, natural products. player in a global agri-food system minds of consumers and preserve A further clear global trend we gearing up to feed nine billion people the premiums we have enjoyed in the are observing is the arrival of by 2050. Our aspiration cannot be past. There is no other choice but to new investors and entrepreneurs to feed the world. Our goal should invest in the future. into the primary sector; people be to provide the most affluent that have previously invested in consumers in the world with the ultra- communications, IT or healthcare but premium part of their diet, the food recognise that agriculture, due to its and beverage they purchase to mark traditional nature and slow adoption of special occasions. As a consequence, 68 | KPMG | FIPS 2015
New Zealand banks must embrace the Fintechs
The marrying of technology with core It is impacting all sectors of the financial services has been termed industry: banking, payments, If they do not, the Fintechs ‘Fintech’ and is seeing exponential insurance, wealth management and will arrive in any case. The growth globally. real estate. evidence from overseas The agglomeration of technology and financial services is ’Fintech‘ – we and in particular Australia is The agglomeration of technology have defined it broadly to include the and financial services is ’Fintech‘. compelling. Digital disruption emergence of new business ventures; is challenging existing the activities and investments in technology innovation from business models, with There are three clear trends that are established financial services firms; as colliding to create an environment estimates that in Australia well as from ICT/technology providers conducive to the Fintechs disrupting around 25–30% of current – collaboration between these parties the New Zealand banking industry: or ‘disruptive innovation’ by any of banking industry revenue is them individually. • customer experience expectations; at risk. • technology developments; and • removal of barriers to entry. •34 SEE FIGURE 34 – PAGE 68
IMPACT ON THE INDUSTRY 34
Digitalisation Personal Finance –Tools to help individuals manage their wealth, including stock portfolios, personal budgets and taxes. Falling cost of computing Big Dataand Analytics – Application of big data and advanced algorithmic techniques to risk management, fraud detection, credit scoring, calculation Cost of insurance premiums, etc. reduction Areas of Financial Payments –Technology and tools to facilitate transactions of virtual Te chnology currencies and mobile payments to eliminate processing costs. innovation Te chnology (Fintech) Front Office –Tools and platforms that drive efficiencies into traditional Ubiquitous banking operations and practices such as loan origination, fundraising and data sales etc.
Changing Capital Markets Technology –Tools and platforms that enable buying and customer selling of securities such as foreign exchange. behaviour FIPS 2015 | KPMG | 69
Customer experience negotiation/settlement, obtaining a expectations loan, and so on. Those that are doing this most successfully are providing An increasingly universal theme in the a highly personalised experience industry is the elimination of friction informed by the data available on the from the user experience as traditional individual customer. There are some institutions and emerging disruptors noteworthy examples of this including compete for customers. The drive is risk- based insurance (modelled to make transactions as simple and at an individual level rather than streamlined as possible. The less time portfolio level). needed to complete a transaction and the fewer ’clicks‘ are the key metrics. It is about identifying and understanding this value chain and The banking industry will need to collaborating with a range of partners proactively respond to growing to deliver the ultimate customer customer expectations. One way to outcome in a seamless way. describe the shift that will need to occur is from excellence in product to The ‘payments space’ has historically Godfrey Boyce excellence in customer experience. been dominated by the banks, but is National Managing Partner – Advisory one of the areas where the Fintechs KPMG are having the most impact. Payments The ‘new world’ game is all about have always been a derived demand how do we create a frictionless, and now the technology exists to easy and simple value proposition remove them from the customer around the entire customer need. experience entirely. It is an opportunity Godfrey is National Managing for merchants to create a new dialogue Partner of KPMG’s Advisory with consumers, but a fundamental practice. He leads KPMG’s As an example, customers don’t get challenge for the issuers and Financial Services advisory up on any given day and say they want their networks. practice in New Zealand. Godfrey a mortgage product from a bank — has over 30 years of audit and instead they desire what the mortgage Technology developments advisory experience across can provide, that is, the benefit of a range of KPMG clients in The technology is now in place to home ownership. So new players Australia, Canada, New Zealand substantially transform financial and banks that need to compete for and the United Kingdom. He has services (e.g. cheap IT, widespread their business in the future, will need wide business experience with a mobile penetration, and the to look at the end-to-end customer particular emphasis on banking, progressive move to real time experience around obtaining a home. investment and corporate payments). While the Fintechs treasury operations. So, it is no longer a product generally set up in competition with development process, whereby, the banks using this new technology strategic focus and investment is we are now seeing some of the UK directed towards simply providing a Fintechs selling their algorithms and better mortgage loan/product. That is data back to the banks. the ‘old world’ game.
The ‘new world’ game is all about The technology is now in place to how do we create a frictionless, easy substantially transform financial and simple value proposition around services. the entire customer need, including research, property search, bidding/ 70 | KPMG | FIPS 2015
One of the key developments has been the new blockchain technology. Blockchain represents a shift in A$27 BILLION OF CURRENT financial services from centralised, 35 BANKING INDUSTRY REVENUE IS AT proprietary systems to more RISK OF DIGITAL DISRUPTION standardised, distributed yet secure systems off a ’trust but verify‘ model. $BILLION This has the potential to transform 30 and disrupt many areas of financial services by lowering costs, reducing 25 barriers to entry and disintermediating players that have been central for many years. 20
15 There is an emerging view that blockchain will become the default 10 global standard distributed ledger for financial transactions. 5 REMOVES DOUBLE COUNTING FOR CREDIT CARDS Many of the world’s global banks have 0 initiated blockchain-related projects. PAYMENTS MERCHANT LENDING – LENDING – TOTAL There is an emerging view that ACQUIRING P2P LENDING SME blockchain will become the default global standard distributed ledger for SOURCE: 2014 MACQUARIE RESEARCH: AUSTRALIAN BANKS financial transactions. ‘TRUST' IN THE IT ARMS RACE; ATO; MCKINSEY
Removal of barriers to entry It has become easier for the Fintechs In New Zealand the FMA has granted This analysis is corroborated by to be successful. They have captured licences to Harmoney, LendMe, looking at Fintechs operating in the the attention of the investment Lending Crowd and Squirrel Money. Australian market. community and are able to access reasonably priced capital. This together What’s at stake? with the substantially reduced costs SEE FIGURE 35 – PAGE 70 for launching a start-up (technology In Australia it is estimated that there is 35 costs and other costs) has enabled A$27 billion of current revenue at risk, those with viable new ideas to go to with the areas of financial services most at risk of digital disruption being • market. The other important factor has been the regulators growing lending, payments and merchant sensitivity to consumer rights and acquiring (generally higher turnover competition post-GFC which has seen areas of the banks operations). willingness, and in some countries encouragement, from the regulators for the Fintechs to enter established banking markets. FIPS 2015 | KPMG | 71
In our recently released joint report with H2 Ventures – ’Fintech 100 – the leading The same opportunities exist in the global Fintech innovators ‘ – there were two of the 50 leading companies from New Zealand market. We have seen Australia and one from New Zealand (Xero). Harmoney establish itself in the New Zealand market as a P2P lender Name Located Company Description with others also entering the market. Prospa Sydney An online small business lender – they provide Our expectations for the New Zealand unsecured business loans and finance for small banking industry based on what we business (loans for under A$20,000 are approved are observing overseas are that: in less than a day). • the banks will retain their SocietyOne Sydney Australia’s leading P2P lending platform – they dominance in areas where there pioneered marketplace lending in Australia to are significant barriers to entry creditworthy borrowers directly with investors. such as accessing central exchange settlement, holding a banking licence and accessing liquidity from There are 50 ‘emerging stars’ which include the following Australian companies: the RBNZ; but • areas which are open to change will Name Located Company Description be targeted including the creation Avoka Sydney Avoka delivers frictionless digital sales and service of proprietary payment networks, transactions for financial institutions, government the front end relationship with agencies and many other industries where consumers, risk assessment and traditional ’shopping cart‘ e-Commerce is not a processing capabilities, monitoring good fit. Internet Protocol (IP) and risk transfer IP. Equitise Sydney The Equitise Investment Platform removes New Zealand Banks should be looking traditional barriers to investing and sourcing capital to collaborate with the Fintechs. by making the process quick, easy and safe. Metamako Sydney Design and manufacture enterprise grade network devices with the goal of simplifying networks, reducing latency and increasing flexibility. Moula Melbourne Moula is one of Australia’s leading providers of unsecured business loans (up to A$100,000). PromisePay Melbourne A fully managed payments platform built just for online marketplaces, which is up and running for customers in a single day with no extra operational overheads or costs. Simply Wall Sydney The company visualises stocks, portfolios and Street Exchange Traded Funds using infographics to help casual investors understand the stock market and become better investors. Stockspot Sydney Helps clients invest in a professionally managed portfolio of global investments (low fee Exchange Traded Funds) for a fraction of the fees charged by traditional financial advisers and fund managers. 72 | KPMG | FIPS 2015
BEPS – latest developments for financial institutions
In an increasingly interconnected world, tax laws have not always kept pace with global corporations, the cross-border movement of capital and the rise of the digital economy. This has led to gaps and mismatches that some multinationals have exploited to minimise their tax bills. Over the last two years the OECD and G20 countries have been working together to address concerns over tax Rachel Piper Darshana Elwela base erosion and profit shifting Partner – Tax National Director – Tax KPMG KPMG (BEPS) by multinationals, culminating in a series of OECD recommendations that were presented in October 2015. Rachel Piper is a Partner in Darshana Elwela is KPMG’s KPMG’s tax team, based National Tax Director. Darshana in Auckland. Rachel has joined KPMG in 2007 and has over 18 years’ experience over 10 years’ experience as The ultimate success of BEPS will advising financial institutions, a tax advisor and senior IRD be dependent on each country including retail banks, branch policy official. He is based in implementing the recommendations. banks, leasing companies Auckland and specialises in funds Each country’s tax rules will need and other financial services management and international to change to align. While there has providers. Rachel has also taxation issues. In his role as been a degree of consensus to date, provided specialist advice on KPMG’s National Tax Director, achieving accord on implementation the tax treatment of financial Darshana is heavily involved in will be much harder. This is because instruments to a number of large working with tax policy officials countries will have different domestic New Zealand corporates and and Government on various tax political considerations, which may has extensive knowledge on the policy changes, including on affect their ability to implement some interaction between the tax rules behalf of a range of clients. or all of the OECD’s recommendations. for financial instruments and the IFRS treatment. The BEPS actions most relevant to the banking sector and the particular consequences for financial institutions are outlined below. Although the final recommendations were presented in October 2015, detailed design on a number of these will carry on into 2016 and beyond. FIPS 2015 | KPMG | 73
Action item: Summary Impact on financial institutions Action 2: Hybrid mismatch The OECD is recommending rules Instruments issued by financial arrangements to address different hybrid mismatch institutions for regulatory capital The aim of Action 2 is to develop arrangements. purposes often have characteristics of a hybrid instrument. domestic rules to neutralise The main recommendation is to include mismatches arising from the use in domestic legislation a primary Although externally issued instruments of hybrid financial instruments and rule that will deny a deduction for a will generally not be caught, where entities. These arise where the tax payment from a hybrid instrument, there has been an intra-group treatment of an instrument or entity with a secondary rule to tax the push down of an externally issued differs between countries. payment if the payer’s jurisdiction instrument, there may be unintended allows a deduction (i.e. if the primary adverse tax consequences. rule does not apply). Similar rules are The OECD recommendations leave proposed to deal with hybrid entities. individual countries with a policy choice A new model tax treaty provision on whether the hybrid mismatch rules dealing with hybrids is also should apply to intra-group regulatory recommended. capital. There is a risk that this will result in counter-parties being required to adopt inconsistent tax positions for the same instrument. Action 4: Interest deductions and The OECD has made best practice The Action 4 final recommendations other financial payments recommendations to prevent tax base are a significant change for many Action 4 seeks to develop rules limiting erosion through the use of excessive countries, including New Zealand, the deductibility of interest and other interest deductions. which has interest limitation rules based on debt/asset ratios. financial payments. The main recommendation is a primary rule to limit interest deductibility based The OECD acknowledges that the on an Interest/EBITDA ratio, with a particular features of banking and corridor of ratios between 10% and insurance groups need to be taken into 30% suggested. account when developing appropriate interest limitation rules for financial If the primary rule is exceeded, a higher institutions. However, the OECD does interest deduction can be allowed if the not go as far as proposing an industry group interest expense is higher. This based exclusion. group-wide ratio rule will be further developed by the OECD in 2016. The OECD has however highlighted the importance of ensuring that any If implemented, these interest limitation rules do not conflict recommendations are likely to replace with or reduce the effectiveness of the current thin capitalisation rules in capital regulation that is intended New Zealand. to reduce the risk of a future financial crisis. Further work will be done by the OECD in 2016 to identify best practice rules to deal with potential BEPS risks relating to banks and insurance companies. 74 | KPMG | FIPS 2015
Action item: Summary Impact on financial institutions Action 7: Permanent establishments The OECD recommends expanding Banks with cross border business The aim of Action 7 is to strengthen the what constitutes a PE, by focusing models will need to review their permanent establishment (PE) concept on the substantial negotiation and procedures to ensure that personnel for establishing taxable presence in conclusion of contracts. in one country are not playing the principal role leading to the conclusion a country. The PE definition will be widened of contracts in other countries. beyond the traditional authority to conclude contracts to include situations Specifically, banks with global booking where “a person habitually plays the models will need to determine principal role leading to conclusion of whether such models give rise to contracts that are routinely concluded incremental PE risks. The OECD’s without material modification”. PE recommendations will also raise additional questions regarding The OECD is also undertaking further the appropriate profits to allocate work in 2016 to provide guidance on across jurisdictions. attribution of profits to the PEs that will result from the proposed changes. Banks with an international client base may find that they have a PE in certain countries, because of senior sales or relationship managers servicing clients. Actions 8–10: Risk and re- The OECD work has resulted in Despite consultation with the banking characterisation/transfer pricing an increased focus on economic industry, a carve-out for financial Actions 8–10 aim to better align substance – where the actual services from the OECD work on risks taxation rights and the attribution of functions, assets and risks of an and capital has not materialised. enterprise reside as compared to legal profit with where economic activity is The impact of these reforms on ownership and contracts – to justify the undertaken. the financial services sector could allocation of returns. be significant if the rules apply The recommendations will be achieved as proposed. However, banks through modification of the OECD’s can take some comfort from the Transfer Pricing Guidelines. acknowledgement by the OECD that further work will be undertaken on profit splits and financial transactions.
The release of the final OECD The OECD is also undertaking further recommendations marks a crucial shift detailed work which will impact on the from the consultation and thinking banking industry and we can expect to about the problem and solutions. It is see further recommendations on these now time for action. areas. New Zealand banks, particularly those with a cross-border presence, The New Zealand Government’s should carefully monitor progress response to the BEPS on BEPS. recommendations is expected in 2016 and 2017, with consultation to follow. FIPS 2015 | KPMG | 75 76 | KPMG | FIPS 2015
Christoph Schumacher Professor for Innovation and Economics Massey University
Professor Christoph Schumacher joined Massey University in 2003, he is Professor of Innovation and Economics at the university and Director of the Auckland Knowledge Exchange Hub. Before coming to New Zealand he completed undergraduate and post- graduate degrees in Engineering, Economics and International Business at Karlsruhe University BANKING in Germany and the University of Auckland and a PhD in mathematical economics at Massey University. Christoph has previously worked as a business consultant in Germany and New Zealand. INDUSTRY Christoph’s area of specialisation is game theory with research interests in mathematical economics, health economics and sports and economics. His work has been FORECASTS published in the Journal of Health Economics, Applied Economics, the European Journal of Marketing, the Journal of Industrial Economics and Economics Letters. FIPS 2015 | KPMG | 77
Before explaining our forecast in more detail, it is pertinent to highlight the In this section, we forecast two forecasting models we have used. the key performance drivers In the ARIMA model, the forecast variable is influenced by the predictor for the New Zealand banking variables, but not vice versa. This is industry, namely lending, net the model we have used in previous interest margin and credit loss years. It is plausible however, that our key performance indicators affect rate. Based on these drivers, each other. This year the VAR model we provide an outlook for has been introduced to see how interaction between our variables the industry’s profit before changes the forecast. We also want tax. We use a combination to point out that although macro- of macro-economic variables economic indicators are not used in the VAR model, the impact of these and time-series analysis to indicators is already factored into past provide quarterly forecasts values of the performance drivers. for the next two years ending We expect before tax banking profits in December 2017. Two to dip slightly in the fourth quarter of forecasts are introduced. In 2015 (actual data not available yet). The 9 dip is more pronounced in our VAR the first (ARIMA ), we use model and is caused by an increase in macro-economic indicators the Credit Loss Rate (CLR) and tighter to forecast the key banking Net Interest Margins (NIM). The small performance drivers. We then reduction in NIM could be due to increased competition in the industry. use these drivers to determine The increase in CLR could be caused the anticipated before tax by the more volatile commodity banking profit. In our second prices that we have experienced in 11 model (VAR10), we use past the second half of 2015. The ARIMA model indicates that after the slight values of the performance dip in Q4 of 2015, banking profits drivers and before tax profits are expected to increase steadily for to make future predictions. 2016 from $1.79 billion to $1.92 billion Our results are displayed in per quarter in 2017. The growth rate is modest and is similar to the BANKING Tables 12 and 13 (page 82). growth experienced during 2014 and We also review the forecast 2015. When we allow for interaction provided in last year’s FIPS, between the performance drivers, review the performance of as in the VAR model, the expected growth for 2016 and 2017 is almost the New Zealand economy in INDUSTRY stagnant rising only from $1.67 billion 2015 and provide an economic in Q1 of 2016 to $1.71 billion in Q4 outlook for 2016. of 2017. The outlook is similar to the growth forecast of the New Zealand economy, very modest and almost FORECASTS stagnant. The fact that profits show growth at all is driven by an increase in lending volume which offsets the continued decrease in NIM. •36 SEE FIGURE 36 – PAGE 78 78 | KPMG | FIPS 2015
Let’s now take a closer look at the industry performance drivers. In the 36 FORECASTING APPROACH ARIMA model, we have used historical data of 10 macro-economic variables, such as inflation, interest rates and Regulation unemployment rates (see Table 11 Determine – page 78), as well as third-party constraints within which entities forecasts to predict the three core have to operate industry performance drivers: lending, net interest margin, and credit loss rate. The resulting forecasts of the three industry drivers are subsequently Industry Industry drivers profit or loss used in a model predicting the Macro-economy l Lending l Net interest l Unemployment profitability of the banking industry. l Net interest income l Inflation margin l Provision for The profit model has also incorporated l Interest rates l Credit loss impairment time series elements to account for rate charges the effect of past values of profit and further improve the quality of the predictions (see Figure 37). In our VAR model, we use the collection of past values of our drivers and before tax Competition Influences profits; that is, a vector of time series, industry dynamics in order to predict future values (see Figure 38).
37 SEE FIGURES 37 AND 38 – PAGE 79 • Net interest margin – the Total industry lending is expected difference between interest income to increase at a reasonable pace • and interest expense, expressed as for the next two years. Both our The definition of industry drivers are: a percentage of lending. ARIMA and VAR models make • Credit loss rate – provision for similar predictions. ARIMA predicts • Lending – the total volume of an increase from $446 billion in lending broadly defined, that is, all credit impairment, expressed as a percentage of lending. Q1 of 2016 to $503 billion in Q4 of interest-earning assets. 2017 while the VAR model sees
TABLE 11: Macro-economic Variables Macro variable Description Units Source gdp Gross Domestic Product (expenditure based) $mn, nominal index RBNZ bankbill90 90-day bank bills rate %, annualised RBNZ govbond10y 10-year government bond yield %, annualised RBNZ unemployed Number of registered unemployed Number RBNZ avgqhouseloancount Average number of home loans approved Number RBNZ estpop Estimated population of New Zealand Thousands Statistics NZ cpindx Consumer Price Index Index level RBNZ housepricendx REINZ house price index Index level REINZ weeklyearnings Weekly earnings $, nominal Statistics NZ nzstocksndx New Zealand all stocks index Index level NZSE FIPS 2015 | KPMG | 79
$BILLION ARIMA PROFIT BEFORE TAX 2.5 37 2.0
1.5 1.0
0.5 0.0 -0.5 PROFIT BEFORE TAX (FORECAST) PROFIT BEFORE TAX (ACTUAL) -1.0 -1.5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
$BILLION VAR PROFIT BEFORE TAX 38 2.5 2.0 1.5
1.0 0.5
0.0 -0.5 PROFIT BEFORE TAX (FORECAST) PROFIT BEFORE TAX (ACTUAL) -1.0 -1.5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
$BILLION ARIMA INDUSTRY LENDING 39 700 600
500
400
LENDING (FORECAST) 300 LENDING (ACTUAL) 200 LOWER 95% CONFIDENCE INTERVAL 100 UPPER 95% CONFIDENCE INTERVAL 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
$BILLION VAR INDUSTRY LENDING 40 700 600
500
400
LENDING (FORECAST) 300 LENDING (ACTUAL) 200 LOWER 95% CONFIDENCE INTERVAL 100 UPPER 95% CONFIDENCE INTERVAL 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 80 | KPMG | FIPS 2015
lending volume to increase from the CLR from 0.1% to 0.20% by the the case that lending rates increase $445 billion to $496 billion. Low levels end of 2017. The increase, however, at a faster pace. This is because of unemployment and a growing is marginal and overall the CLR is low environments of higher inflation often population base are contributing due to the stringent lending policies of entail greater credit risk which banks factors. Growth is steady, although New Zealand’s banks. need to offset with greater margins. a slightly slower pace is expected New Zealand’s inflation rate in 2015 than in the past two years. This could remained at around 1% and with be caused by an anticipated slowing 43 SEE FIGURES 43 AND 44 – the recent sharp drop in oil prices of housing sales as well as a more PAGE 81 inflation may decline further over modest outlook of GDP growth 2016, possibly to levels just above in New Zealand. The anticipated • 0% (see last paragraph of article for lending growth is slightly lower when further explanation). Indeed, if this we consider the impact of other Changes in our macro-economic occurs and the positive relationship industry drivers. indicators may impact the industry between NIMs and inflation continues, drivers used in our model. The then it is expected that NIMs will regression results suggest that continue to tighten. In addition to this, changes in lending volume are increased competition in the banking 39 SEE FIGURES 39 AND 40 – inversely related with changes in PAGE 79 industry is also likely to play a role in unemployment. New Zealand’s the forecasted declines in NIMs over • unemployment rate is expected the next two years. This is due to a to stabilise or decrease slightly combination of competition between NIMs are expected to decrease ever in the coming years providing a existing banks and the addition of new so slightly over the next two years. stable platform for lending by banks. banks to the New Zealand banking As already mentioned, this is due to Furthermore, with the OCR back at industry. The forecasted contraction greater competition (e.g. the Bank record lows, borrowing will be cheaper in NIMs is the key factor that, we of China and the China Construction which contributes to the anticipated believe, will moderate the growth of Bank entered the market in 2014) as increase in lending volume. Another banking industry profits over the next well as a relatively low-risk business factor that will likely exert a positive two years. environment and a low OCR. ARIMA influence on the lending volumes of predictions are a decrease from 2.14% banks is growth in New Zealand’s Interest rates are expected to fall in Q1 of 2016 to 2.06% in Q4 of 2017 population. Over 2015, New Zealand’s even further which historically leads while the VAR model sees NIMs fall population grew at its fastest rate in to a drop of the CLR (a drop in from 2.17% to 2.13%. over a decade. Overall the country’s interest rates puts less pressure on population increased by 86,900 people borrowers resulting in a lower number or 1.9%, in the year to June 2015. of defaults). However, this trend may be dominated by an increase in SEE FIGURES 41 AND 42 – Especially the net migration of 58,300 41 household debt in 2015. In September PAGE 81 will contribute to the anticipated increase in lending volumes as more 2014, household debt as a percentage • people will deposit their capital into of disposable income was 156.2%, New Zealand and utilise the lending up from 154.2% in the year earlier. The CLR increased slightly in 2014 and facilities of our banks (natural increase By the same time in 2015 the figure was stagnant in 2015. We expect this of 28,700; all figures from Statistics reached 160%. Although the present trend to continue in 2016. Our ARIMA New Zealand). levels of household debt are not model predicts an initial increase of particularly alarming compared with the CLR from 0.1% to 0.12% and Inflation is a key factor that is other countries, the rate at which this rate is expected to stay this way positively associated with the NIMs households become increasingly for 2016 and 2017. Our VAR model of banks. While inflation results in leveraged is a factor to watch. This is provides a slightly more pessimistic an increase in both bank lending possibly reflected in the slight increase outlook with a steady increase of and deposit rates, it tends to be in the CLR. Another related factor FIPS 2015 | KPMG | 81
% ARIMA INDUSTRY NET 3.0 41 INTEREST MARGIN 2.5
2.0
1.5 NET INTEREST MARGIN (FORECAST) NET INTEREST MARGIN (ACTUAL) 1.0 LOWER 95% CONFIDENCE INTERVAL 0.5 UPPER 95% CONFIDENCE INTERVAL 0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
% VAR INDUSTRY NET INTEREST 3.0 42 MARGIN 2.5
2.0
1.5 NET INTEREST MARGIN (FORECAST) NET INTEREST MARGIN (ACTUAL) 1.0 LOWER 95% CONFIDENCE INTERVAL 0.5 UPPER 95% CONFIDENCE INTERVAL 0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
% ARIMA CREDIT LOSS RATE 2.0 43 1.5
1.0
0.5
CREDIT LOSS RATE (FORECAST) 0.0
CREDIT LOSS RATE (ACTUAL) -0.5 LOWER 95% CONFIDENCE INTERVAL UPPER 95% CONFIDENCE INTERVAL -1.0 -1.5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
% VAR CREDIT LOSS RATE 44 2.0 1.5
1.0
0.5
CREDIT LOSS RATE (FORECAST) 0.0
CREDIT LOSS RATE (ACTUAL) -0.5 LOWER 95% CONFIDENCE INTERVAL UPPER 95% CONFIDENCE INTERVAL -1.0 -1.5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 82 | KPMG | FIPS 2015
that deserves consideration is rural regulatory changes in this analysis. This it is difficult to ascertain when exactly debt-to-income ratios. Over the past is a limitation since regulatory changes changes will be implemented, and as a few years, high commodity prices can clearly have a large impact on result, they have not been considered have helped to offset any deterioration lending volume, margins, and CLRs. in our analysis. of asset quality in the rural sector. Preventative measures taken by the Comparing our 2015 forecast of However, weak commodity prices of RBNZ, such as more stringent capital industry drivers and industry profit late have resulted in decreasing dairy requirements on high LVR lending, before tax (see Financial Institutions exports. If commodity prices continue which were intended to slow the Performance Survey 2014) with how to remain low, this will place strain increase in house prices, have surely these drivers actually fared in 2015, on rural borrowers and may increase impacted overall lending and credit we find that all our predictions are well credit losses. losses within the banking industry over within the 95% confidence interval. the past few years. Although, there are Despite their obvious importance, we At a closer glance, both lending indications that these restrictions may do not attempt to take into account volume and the CLR over 2015 were start to be relaxed in the near future,
TABLE 12: 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 ARIMA Industry Driver Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Upper CI 452 467 482 496 511 526 541 556 572 Lending ($Billion) Forecast 413 425 430 438 446 454 462 470 478 486 494 503 Lower CI 425 426 428 430 432 434 437 439 442 Upper CI 2.3% 2.4% 2.4% 2.4% 2.4% 2.5% 2.5% 2.5% 2.5% Net Interest Forecast 2.32% 2.12% 2.17% 2.14% 2.14% 2.12% 2.11% 2.10% 2.09% 2.08% 2.07% 2.06% Margin (%) Lower CI 2.0% 1.9% 1.9% 1.8% 1.8% 1.8% 1.8% 1.7% 1.7% Upper CI 0.2% 0.3% 0.3% 0.4% 0.4% 0.5% 0.5% 0.5% 0.6% Credit Loss Rate Forecast 0.10% 0.10% 0.10% 0.13% 0.12% 0.12% 0.12% 0.12% 0.12% 0.12% 0.12% 0.12% (%) Lower CI 0.0% 0.0% -0.1% -0.1% -0.2% -0.2% -0.3% -0.3% -0.3%
Profit Before Tax Forecast 1.79 1.81 1.82 1.76 1.79 1.81 1.83 1.84 1.86 1.88 1.90 1.92 ($Billion)*
TABLE 13: 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 VAR Industry Driver Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Upper CI 450 464 477 489 501 514 526 538 550 Lending ($Billion) Forecast 413 425 430 437 445 453 460 468 475 482 489 496 Lower CI 424 427 430 433 437 440 443 446 448 Upper CI 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% Net Interest Forecast 2.32% 2.12% 2.17% 2.2% 2.17% 2.16% 2.15% 2.15% 2.14% 2.14% 2.13% 2.13% Margin (%) Lower CI 2.0% 2.0% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% Upper CI 0.2% 0.3% 0.3% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% Credit Loss Rate Forecast 0.10% 0.10% 0.10% 0.11% 0.12% 0.14% 0.15% 0.16% 0.17% 0.18% 0.19% 0.20% (%) Lower CI 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Profit Before Tax Forecast 1.79 1.81 1.82 1.68 1.67 1.67 1.67 1.68 1.68 1.69 1.70 1.71 ($Billion)*
* Note: Forecasts for profit before-tax will seem less than in the forecasts of previous publications due to the fact that the figures are not annualised. FIPS 2015 | KPMG | 83
marginally higher than anticipated The New Zealand dollar continued to prices. Furthermore, the continued while the NIM was very close to our depreciate in the second half of 2015 strengthening of the NZD-AUD prediction. Overall this had a slightly which resulted in higher business exchange rate may hurt export negative impact on the profit before prices. Especially in the September volumes to Australia, one of our largest tax prediction with actual values being quarter, business input and output trading partners. Volatile commodity marginally lower than anticipated. prices increased faster than in the first prices, especially the falling dairy price, half of the year, driven by agriculture, may also slow down economic growth We now take a closer look at the petrol and imported capital. The as already experienced in the second performance of the New Zealand flow through of the lower exchange half of 2015. economy. In 2015, the New Zealand rate increased tradable inflation and economy could not quite replicate On a more positive note, there are consumer prices increased by around the strong performance from 2014. global macro-economic factors that 0.4% over the year. Inflation decreased GDP growth fell from around 2.8% may have a beneficial impact on the from around 1.2% in 2014 to below 1% in 2014 (Q3, 2014) to 0.4% in 2015 New Zealand economy. Improvements in 2015. Overall, the depreciation of (Q2, 2015), but increased slightly to in the US economy provide confidence the New Zealand dollar had a positive 0.6% by the end of the year, driven that the world economy is progressing effect on the economy due to benefits by private consumption, tourism on the right track. Europe’s financial for exporters and the tourism industry. and residential investments. While woes also seem to be under control business confidence was still high, Due to falling dairy prices in the for now. Germany’s economic growth the unemployment rate increased second half of 2015, the terms of trade is projected to strengthen further in slightly from 5.4% in September 2014 decreased by 3.7%. While overall 2016 and the outlook for the United to 6.0% a year later. However, despite exports increased due to the weaker Kingdom and France is also positive. a decrease in employment, private New Zealand dollar, dairy export values With Europe’s powerhouses in consumption increased which boosted decreased due to lower dairy prices. reasonably good shape, the risk of household spending. Although we saw a slight recovery a collapse of Europe’s economies is starting in October, it may take lower than in past years. While the 2015 saw a drop in housing some time for prices to recover from recent decline in oil prices will surely construction activity. After a seven- their low. hurt oil producing countries, it will year high construction GDP at the offer benefits to New Zealand. That is, end of 2014, real GDP construction Globally, we saw a sustained recovery New Zealand oil prices have quite a growth fell from around 3.5% to of the US economy, however, slower strong cost-push effect on consumer 1%. Housing demand also slowed growth in the other major advanced prices, largely driven by higher sharply in the last quarter of 2015 as economies. Of international concern transport services costs. If oil prices the market responded to regulatory is the slowdown of the Chinese continue to decline, consumers should changes. Especially in Auckland, both economy with anticipated further not only expect cheaper petrol prices, house sales and house prices fell as drops in 2016. This could negatively but also cheaper prices for consumer tighter government property taxation impact the New Zealand economy if goods that undergo substantial rules came into effect. In the rest of this trend continues. transportation. New Zealand, however, demand for 2016 is expected to follow a houses stabilised as buyers were To conclude, the banking industry and similar trend to 2015. Overall, looking for more affordable housing the New Zealand economy are in good the New Zealand economy is in outside the Auckland area. In terms of shape. The industry outlook closely good shape with modest GDP dwelling consent volumes, numbers follows the economic performance growth expectations, a stabilising for areas outside Auckland and the of New Zealand: our banks continue unemployment rate, low inflation greater Christchurch area are largely to generate healthy profits while also (especially if oil prices continue to flat. In Auckland, however, the number maintaining strong capital ratios, fall) and a low OCR. Potential risk of consents is still growing, but not as however, profit growth is expected to factors to the New Zealand economic fast as in 2014. be very modest or stagnant similar to performance are developments in the anticipated GDP growth. China as well as poor commodity 84 | KPMG | FIPS 2015
NON-BANKING INDUSTRY OVERVIEW FIPS 2015 | KPMG | 85 86 | KPMG | FIPS 2015
Non-banks – Industry overview
The non-bank sector achieved profits aware they are in ‘the very best part of $254.62 million. Compared to the of the impairment cycle’. A number of 2015 – A solid year for the 2014 year, the overall result was a Executives are keeping a keen eye for non-bank sector helped by the decrease in net profit after tax by early indicators of impairment growth. 6.67% or $18.20 million. This was Another comment made by Executives momentum from prior years mainly the result of an increase in was that the low level of impairment despite some competitive operating expenses of $48.49 million experienced this year also has a lot challenges. that more than offset the strong to do with the asset values held as increases in interest income and other securities, especially when these income. The non-bank sector has asset values need to be tested through also experienced some contraction a quick sale. Executives commented in margins, decreasing 32 basis that as interest rates continue to points (bps) despite the underlying be low with plenty of liquidity and net interest income increasing by a stable market, it is a good time to $23.36 million. This increase was dispose of any problematic exposures, driven mainly by the combination of with the accompanying argument that an increase in interest income due if a loan “can’t wash its face” in the to asset growth and flat funding current market it will never be able to rates. This increase is a remarkable “and therefore it would be best exited achievement considering the current as plenty of participants are looking low interest rate environment and the for volume”. Operating expenses have intense competition coming from both increased significantly which has existing market players, new entrants, undone all the improvements seen banks and peer-to-peer (P2P) lenders. in the net interest income and non- interest income.
The non-bank sector achieved profits of $254.62 million. The sector has also continued to show significant asset growth, increasing by $487.64 million over The sector has also continued to show the prior year. significant asset growth, increasing by $487.64 million over the prior year. Asset quality has remained strong and is not showing significant Margins continue to contract signs of deterioration with impaired Net interest income has increased by asset expense only increasing $23.36 million, a 3.26% increase on by $2.30 million compared to the the previous year, driven by strong previous year. lending growth. A dominant theme this year was entities achieving Executives interviewed commented growth in their loan portfolios through that recent softening conditions securitisation vehicles established with prevailing in the economic the help of investor or bank funding environment have not yet resulted or renewed growth via increased in an increase in impaired assets; bank facilities. however, some commented that they remain mindful of credit quality when writing new deals as they are FIPS 2015 | KPMG | 87
The investment opportunities provided deposit rates drop below a certain conditions for certain lending products by securitisation will continue to be point and investors chase yield. such as those that do not fit the banks’ attractive to investors abroad who “black box” lending criteria. Another interesting comment made are chasing yield in a globally low by the survey participants was that Non-bank lenders repeatedly tell us the yield environment with local entities banks are very willing to fund non- banks have a pre-set criteria for lending benefiting from securitisation via bank participants at very competitive based around security percentages and both the mix of funding they achieve rates or support the establishment of type, repayment ability, credit history, and the way these structures assist a securitisation vehicle. This is because cash flows. If these criteria are met in maximising their returns and they have an established relationship (i.e. the loan fits inside the parameters allowing growth. with the non-bank entity and they of the box), a loan is concluded to be know the entity’s lending practices, of good quality and quickly settled. But Operating expenses have increased but most importantly, these non-bank just outside the parameters of the box significantly which has undone all entities also have their own capital at there is still a lot of good lending to be the improvements seen in the net stake in the ultimate lending equation. done for those prepared to analyse, interest income and non-interest take on and manage the different risk. income. Despite the good news about This year, it was perceived by survey lending, NIM for the sector participants that the banks’ “black contracted 32 bps from 6.94% box” has been more consistent in Despite the good news about lending, to 6.62%. its size meaning that there is a more net interest margin (NIM) for the stable, but still very good market sector contracted 32 bps from 6.94% around the perimeter of that black box. to 6.62%. This was mainly driven by an Banks are also reviewing their lending Some participants said that they have increase in interest expense by 17.87% practices with the onset of conduct managed to successfully grow their attributable to an increase in interest risk and they are less prepared to loan books and establish their position bearing liabilities and also due to the lend to some borrowers directly, in the market place by operating at fact that some financial institutions or customers who represent a the periphery of the banks’ “black still have funding priced around the significantly different credit risk to their box”, targeting customers that are still time of the 2014 Reserve Bank of normal customer or to other entities of a good quality but just not quite New Zealand (RBNZ) Official Cash who then on-lend with less rigorous fitting within the banks’ “black box”. Rate (OCR) rises, and the re-pricing lending practices. An example might be a customer who impact of the current year falls in the needs bridging finance, but does not OCR has been delayed. Competition continues to be have regular cash flows from income; The increase in interest bearing fierce non-bank sector participants are happy to provide this type of finance as long liabilities is reflective of comments Clearly competition has not eased as they have a mortgage registered on made by Executives in relation to and continues to be tight. Executives all securities held. the high levels of liquidity prevailing commented that competition in the market, with some entities continues to be aggressive and it being approached by investors does not seem to take a breath. New Executives commented that with large deposits who have an market entrants, emergence of P2P competition continues to be appetite for higher yields offered by lenders and banks still trying to entice aggressive and it does not seem to non-bank entities. Some Executives away clients have been the common take a breath. commented that they had to adjust theme amongst Executives surveyed. deposit rates downwards when they Having said that, participants also had large amounts of investors’ dollars perceive new growth opportunities Surveyed participants also commented flooding in the door. Another common arising from the M&A activity in the that competition from banks has not comment we heard was that this sector, as new buyers digest their new been consistent during the period surplus of liquidity occurs when bank acquisitions and see favourable market 88 | KPMG | FIPS 2015
with the banks sometimes having a now licenced by the Financial Markets P2P lenders are utilising online presence in the non-bank market and Authority (FMA) – Harmoney, Squirrel platforms in an attempt to reduce sometimes not. Some Executives Money, LendMe and LendingCrowd. borrowing costs, create efficiencies said that on balance they have not and obtain national reach, together Harmoney has the largest presence perceived as much competition from with speed of delivery. Many sector with its loan book having reached banks in the personal loan market participants felt it is becoming about $106 million this year per media but when they do it will be at very critical to better utilise technology to reports. Harmoney has reportedly competitive rates. Other Executives remain competitive in the non-bank secured $200 million of institutional perceived that the banks will get sector of the market. While the front funding from the UK based Global into other areas, such as personal offices of P2P lenders appear to be Investments plc; however, the bulk or vehicle lending when they are technologically impressive, there of this is anticipated to be used in its struggling to fill their mortgage volume remain questions as to how mature soon to be launched Australian online targets and they appear to successfully the back office functions are. platform. Harmoney is 80% funded take some business away from certain by institutional investors, including non-bank sector participants offering Heartland Bank which also provides more competitive rates, but this Many surveyed felt that these funding via the online platform. doesn’t last for a prolonged period. entities and their strengths would Harmoney’s default rate for the year not be tested until they have been was reported at 4.5%. Disruptors – Peer to peer through the full economic cycle. lending One of two methods is used by P2P Lenders: “fractionalisation” or The number of licensed P2P lenders “Reserve Fund”. The ‘fractionalisation’ Some of the concerns around P2P has now reached four and they have method is used by P2P lenders to lenders voiced by the Executives definitely arrived in the market. spread borrower risks, and thus far surveyed include the perceived limited Executives surveyed agreed that P2P they have been operating at the edges, regulatory oversight (exemptions that lenders are the biggest disruptor in the lending out smaller sized unsecured have been granted) with P2P lenders personal/consumer market space at loans. The Reserve Fund model for example not being subject to the moment. With more P2P lenders reduces the return slightly to each responsible lending guidelines, the planning to venture into other markets investor, but uses it to create a reserve reduced visibility of potential losses as such as property lending, vehicle and fund to help with any credit event. the asset book and performance are equipment finance, competition will not reported in the traditional way, in certainly not ease over the coming a set of financial statements. These years. The real impact is not from P2P lenders are utilising online P2P entities have been set up in very the amount lent (some claimed platforms in an attempt to reduce benign times (full employment, low $150 million to date), but more from borrowing costs, create efficiencies interest rates) and are yet to be tested the efficiency and sharpness of their and obtain national reach. in a downturn. Many surveyed felt distribution models and the entities’ that these entities and their strengths agility and the fact they provide yet would not be tested until they have another option to borrowers. P2P lenders are now also eyeing been through the full economic cycle. potential opportunities in the Small Lessons have been learned abroad with Quakle in UK going under in The number of licensed P2P lenders to Medium Enterprise (SME) space. 2011 and a number of P2P lending has now reached four and they have LendMe is aiming to focus on secured websites closing in China as borrowers definitely arrived in the market. loans up to $2 million, however is still in the process of negotiating a funding defaulted. There is no doubt this deal with an un-named New Zealand is an interesting development and trading bank. something which we have explained in As mentioned above, P2P lenders have a little more detail on page 106. emerged over the past year, with four FIPS 2015 | KPMG | 89
Regulation becoming In March 2015 the Court of Appeal Challenges and business as usual rejected claims by Motor Trade opportunities of the Finance in the long running credit Regulation is now embedded in business model for particular fees case brought by the Commerce the non-bank lenders’ culture, and sectors Commission regarding alleged although compliance is costly and unreasonable establishment and other Finance companies associated has posed a significant constraint on credit fees on 39 finance contracts with and supporting particular resource, it is generally perceived between 2005 and 2008 under the manufacturing brands (whether more positively in this survey as it CCCFA. The Supreme Court has it be motor vehicle or business has taken a role in strengthening the since granted leave to MTF to appeal equipment) have their own set of sector and creating some form of this decision. unique opportunities and challenges. barrier to entry. Their competitive advantage lies in their association to a well-known and The “Responsible Lending Code” respected brand and the ongoing Regulation is now embedded in the and the provisions regarding pipeline of business coming from their non-bank lenders’ culture reasonable credit fees came into brand retailers, or indeed the way they effect on 6 June 2015. can assist the retailer to make a sale. However, for some they appear to be From 1 November 2015 all registered experiencing restrictions in terms of banks are required to distinguish loans The “Responsible Lending Code” and deals they are allowed to do, either for residential property investment the provisions regarding reasonable in the form of a requirement any deal from other residential property loans, credit fees came into effect on 6 June should have a nexus to the brand with loans written for investment 2015. This places greater onus on or the group, or restrictions on local property in Auckland now requiring at the participants to determine the product development due to conduct least 30% deposit. This will push more appropriateness of lending, based on risk concerns. deals outside the banks’ “black box”, factors such as the borrowers’ ability providing further opportunities for non- Some of the Executives interviewed to repay and the suitability of the banks to fund. remarked that these restrictions financial products. The Code will not be have evolved mostly in response to The Credit Contracts and Consumer binding; however, it will form evidence reputational and conduct risk. New Finance Amendments (CCCFA) Act of compliance with the binding lender found global caution is taken to ensure 2014 which came into effect in June responsibility principles set out in the that the customer is not only sold the 2015 is back in the spotlight as the CCCFA Act. Some of the feedback right product, but treating customers Commerce Commission is considering received from the Executives surveyed fairly has become very important due whether the P2P lenders fees are was that the Code really only makes to the risk of miss-selling of financial covered by the fees provisions of the already responsible lenders document products and any inappropriate culture CCCFA. The CCCFA fee provisions why they are responsible lenders around the sale. permit fees that only recover the cost and does not reach the right people of the service they relate to, with the in the sense it has had little impact In relation to the motor vehicles expectation that the lenders should on payday, car boot, and truck shop finance and leasing industry, some earn their return from interest rates. lenders. Another comment made was Executives commented that the There is uncertainty as to whether it seems to help to regulate people manufacturers are placing very high P2P lender fees are caught by the who need to help themselves, in other expectations on dealers and set CCCFA. A ruling in this area could have words, it is perceived as a piece of high targets before any rebate can a material impact on the growth of this regulation looking to have the finance be achieved. This has a number of sub sector. companies ‘save’ the borrowers flow on effects: it has forced dealers from themselves. to pre-register vehicles, building inventory which will be funded by the non-bank lenders, but a consequence 90 | KPMG | FIPS 2015
is depressed sales margins as the last Then, Canada’s Element Financial renewal, and while its new owners few “target” vehicles are sold. Dealers Corporation bought Custom Fleet NZ settle into the role. are starting to see low margins from GE Capital for $590 million. The The other significant transaction in the become even lower and an increased last deal done by GE in November, was market has been the sale of Fisher need to sell vehicles to get rebates the sale of the GE Capital Australian & Paykel (F&P) Finance to ASX-listed drives down the price of second hand and New Zealand commercial lending FlexiGroup for $315 million, with vehicles. As a result, finance income, and leasing portfolios to Sankaty purchase price paid $250 million insurance, warranties, and servicing Advisors, and affiliate of US private in cash and $65 million deferred play an increased role for the dealers’ equity group Bain Capital for an consideration. This transaction is overall margin. This combined with undisclosed amount. subject to approval by the Overseas much of the sales growth in vehicle Investment Office and the RBNZ. numbers going to the rental sector, only further depresses margins. During the past survey period we F&P Finance has undergone major have seen two large transactions changes this year, having been Groups which manufacture and take place. restructured and having established a finance their products have their own securitisation programme under which competitive advantage. Maintaining it sold $275 million of receivables from and strengthening customer These deals will complete the sale its Q card to its immediate parent relationships has become a critical of all of GE Capital’s businesses in F&P Finance Holdings. Q Card is F&P factor in entities that manufacture and Australia and New Zealand. This move main product with a consumer card finance their products, as one supplier was part of the wider global strategy service and network comprising over instead of several, can be positioned by GE to focus on its core industrial 10,000 retail outlets and more than to provide not just an individual businesses. 148,000 customers. This was followed product, but a total business solution by the sale of its Consumer Insurance in the business equipment market. GE Money, New Zealand’s biggest Services unit that offers insurance and These entities are now assessing consumer finance company, is product protection policies to retailers the profitability and performance of estimated to have about 450,000 and consumers for $20.1 million in the operating and financing entities customers and provides a range of December 2014, and the transfer of collectively as they operate under financial services such as personal software and intangible assets for a joint strategy with less concern loans, credit cards and interest $7.3 million to its parent. for the apportionment of profit free retail finance. It has strategic margins between the operating and partnerships with Kiwibank and Motor Trade Finance (MTF) continues finance arm. many of the major retailers such to excite interest from parties as Harvey Norman and Michael interested in acquiring a stake in or Major acquisition activity Hill. It includes the GEM Visa card all of the company. Heartland, in a with 158,000 cardholders, and the During the past survey period we statement released in September Countdown OneCard Visa credit card have seen two large transactions take 2015, said that it was still interested with 10,000 customers. The sales place. Firstly, GE Capital has signed in acquiring MTF if the company’s process provides for some of these agreements to sell its New Zealand shareholders were receptive of the products or relationships to be re- consumer and commercial financing offer and MTF’s loan fees dispute designed/re-branded. businesses. The first one to be sold, with the Commerce Commission was consumer finance company Some of the Executives surveyed felt is resolved. This followed a move GE Money as part of the wider this transaction could bring valuable made by Turners Finance, which was A$8.2 billion deal to a consortium of opportunities as the ex-GE business seeking up to 20% of MTF’s shares global investors, Varde Partners, private potentially undergoes major changes in an unsolicited offer. On 29th of equity group KKR, and Deustche Bank. in terms of its funding structure, October, Turners Finance announced business partnership arrangements, that it had received valid acceptances some of which are coming up for approved by the MTF Board taking its FIPS 2015 | KPMG | 91
shareholding to 7.6% of the ordinary Financial Stability Report, however regulatory requirements, which have shares of MTF. the RBNZ has remained of the view become ’business as usual’. that the New Zealand financial system With competition continuing to continues to perform well despite be aggressive from the traditional Executives commented that in these concerns. order to achieve growth, they focus banks and P2P lenders, Executives on quality sustainable customer Global interest rates are expected to commented that continued investment relationships. remain low for a prolonged period. in technology and online platforms will The relatively higher yields offered be crucial to remain competitive and by sector participants remain very meet clients’ needs. attractive to overseas institutions Other survey participants have As the sector continues to change and in a globally low yield environment, experienced good growth during the evolve, sector participants are very with participants continuing to enjoy year which has been largely organic. clear about their individual strategies a strong pipeline of liquidity helping Executives commented that in order to in order to remain competitive. support asset growth. achieve growth, they focus on quality Sector participants agreed that there sustainable customer relationships. is no lack of business opportunities Some entities have offered a wide Global interest rates are expected to in the current environment, but the range of new products in order to remain low for a prolonged period. difference between them is that have a wider reach and increase their some companies are restricted by the customer base. overall ‘Parent’ strategy and business Many of the Executives surveyed The recent tightening of LVR models which means that they are not continue to be on the lookout for requirements by RBNZ, such as allowed to venture into new products potential acquisition targets to new rules for property investors, will not developed by the ‘Parent’ or achieve growth and scale to maintain provide further growth opportunities products which do not have a nexus competitiveness. for the non-bank sector. Additionally, with the ‘Parent’ company. In the past, the non-banks have been able to it appears that some of these entities The Future – A non-bank accommodate good quality borrowers had been able to do non-core lending sector which continues to wishing to diversify from their current activities with a ‘blessing’ from the ‘Parent’, but due to concerns around change banking relationships, and post the Global Financial Crisis (GFC) many conduct risk, this now appears to be Over the course of this year the RBNZ customers are opting for a multi decreasing, making it more difficult to has reversed almost all the OCR provider finance solution to avoid do some deals and leaving a gap in the hikes it imposed last year, with the depending on one party, and in some market which can be taken by other OCR now back to 2.75% compared cases, prevent financiers from seeing entities who do not have restrictions to to its lowest point in over a decade the whole picture of their wealth. do such type of deals. of 2.50%. The RBNZ commented in its September 2015 statement that a Credit quality remains strong, however, Sector participants are optimistic about further easing in OCR seems likely. survey participants acknowledge that business opportunities over the next Some economists are predicting they feel they are in as good a part of year. With a stable economy, rising further cuts in 2016 with some saying the cycle as they can get. business and consumer confidence, that it could go as low as 2.0%. low interest rates and plenty of Regulation seems now to be Persistently low inflation, softening liquidity, considerable pipeline of embedded in the entities’ culture and global economic outlook, concerns construction activity and strong net while being viewed as necessary over slowing growth in China and East migration being all positive factors to and strengthening the sector’s Asia, increased volatility in financial put the non-bank sector in a strong behaviour, the compliance is costly markets and falls in commodity position for next year. and onerous. There has been a slight prices have been downside risks decrease in the negative sentiment on noted in the RBNZ November 2015 92 | KPMG | FIPS 2015
Non-banks – Timeline of events
extent to which they are operating in • 12th • Jan. 2015 New Zealand. Unsecured creditors of Smith 12th & Davies (NZ) Ltd agreed on a • 23rd NZCU Baywide is issued its Non-bank • compromise payment of an average Nelson Building Society is issued its Deposit Takers (NBDT) Licence by the amount of 26.46 cents in the dollar, NBDT Licence by the RBNZ. RBNZ. which allowed the company to avoid Trade Me purchases a 15% • 31st liquidation. Estimated values of the shareholding in Harmoney, Court of Appeal rejects Motor Trade unsatisfied debt to GE Finance and New Zealand’s first fully licensed Finance Ltd’s (MTF) appeal in the long Mercedes-Benz Financial Services peer‑to-peer (P2P) lender. running credit fees case brought by Ltd are $11.2 million and $12.5 million the Commerce Commission regarding respectively. 28th • alleged unreasonable establishment 28th The FMA and NZX sign a and other credit fees on 39 finance • Harmoney reaches a milestone, having memorandum of understanding, contracts between 2005 and 2008. to co-operate in the regulation of lent out over $50 million in loans to date. New Zealand’s capital markets. • Apr. 2015 29th • 2nd The RBNZ leaves the OCR unchanged • • Jun. 2015 Two of the largest logging companies at 3.50%. • 2nd in Northland – HarvestPro and Smith The RBNZ seeks expressions of and Davies (NZ) Ltd are faced with interest for the acquisition of the • Feb. 2015 bankruptcy, owing $24.9 million to NZClear security settlement and 13th GE Finance, Mercedes Benz Financial depository business. • Services Ltd, and Itochu Corporation. Credit Union South is issued its NBDT 6th Licence by the RBNZ. GE Finance and Mercedes Benz • Financial Services Ltd repossessed the The Responsible Lending Code comes financed equipment. into effect. • Mar. 2015 • 8th • 8th • 2nd Wairarapa Building Society is issued its The FMA reached a $10.24 million UDC Finance is issued its NBDT NBDT Licence by the RBNZ. settlement with failed finance Licence by the RBNZ. company Dominion Finance. • 30th • 5th The RBNZ leaves OCR unchanged • 11th First Credit Union is issued its NBDT at 3.50%. The RBNZ cuts the OCR by 25 bps Licence by the RBNZ. to 3.25%. 12th • May. 2015 • 16th • NXT, a NZX licenced market for SME’s, The RBNZ leaves the OCR unchanged 1st • welcomes its first listing. at 3.50%. The RBNZ announces they have • 16th completed the NBDT licencing of • 30th General Electric sells their Australian 31 entities. General Electric announces agreement and New Zealand consumer to sell the bulk of GE Capital Fleet • 7th Services for US$6.9 billion to finance divisions to a consortium of Fisher & Paykel Finance Ltd is offered investors – Varde Partners, KKR & Element Financial Corporation, for sale by its ultimate parent Haier including fleet-financing businesses in Co, and Deutsche Bank for a total of Group. $A8.2 billion. Australia, Mexico, New Zealand and 11th United States. 19th • • LendMe is issued its licence by the FMA removes at least 23 companies RBNZ to become New Zealand’s • Jul. 2015 to date from its Financial Services second P2P lender, with focus on Provider Register (FSPR), and denies offering secured loans up to $2 million. • 7th registration of another 20 companies The FMA reach an out of court for misrepresenting the limited settlement agreement with failed FIPS 2015 | KPMG | 93
finance company Hanover Finance for • 27th a sum of $18 million. • Sep. 2015 Fisher & Paykel Finance are bought by 2 Cheap Cars move its $30 million per • 10th FlexiGroup for $315 million. The RBNZ cuts the OCR by 25 bps annum finance business from UDC 29th to 2.75%. • Finance to Finance Now, a subsidiary Turners Finance Ltd receives of the SBS Bank. Fitch Ratings affirmed the long-term shareholder acceptances approved 11th and short-term credit ratings of by MTF’s Board to acquire shares • Nelson Building Society and Wairarapa Wayne Percival is appointed CEO and increase its shareholding in MTF Building Society. of UDC Finance, having previously to 7.6%. headed the Specialist Distribution • 15th The RBNZ leaves the OCR unchanged team for ANZ’s Retail and Business Turners Finance Ltd has made an at 2.75%. Banking division. unsolicited offer to MTF shareholders 23rd to buy ordinary shares at $1.15 per • share in a bid to acquire 20% of MTF. • Nov. 2015 The RBNZ cuts the OCR by 25 bps to 1st 3.00%. • • 17th The RBNZ’s new LVR restrictions 27th NZCU South announces establishment relating to investment property come • of a securitisation programme with The FMA issues a Stop Order against into force. Westpac, providing it access to Green Gardens Finance Trust Ltd $50 million funding. 2nd due to non-compliant investment • Squirrel Money commences offerings and cautions the public about • 18th operations in New Zealand. depositing money with them. In response to Turners’ offer, Heartland New Zealand expresses an interest 6th 30th • • in making an offer for a full takeover The Warehouse launches two new Turners Finance Ltd announce they of MTF. credit cards (Warehouse Money Visa have entered into an unconditional Card and The Purple Credit Card Visa) agreement to purchase Christchurch 26th through its new subsidiary trading as based Southern Finance Ltd for • Harmoney reaches a milestone, having ‘Warehouse Money’. $5 million with a settlement date of lent out over $100 million in loans, 31 July 2015. and announces that an international • 10th P2P funder, P2P Global Investments, The Supreme Court grants leave to is to provide $200 million in additional MTF and Sportzone Motorcycles • Aug. 2015 funding and acquire a 4.5% stake in to appeal a decision by the Court of • 5th the business. Appeal over breaches to the CCCFA. The Commerce Commission begin GE Capital agrees to the sale of its inquiry as to whether P2P lender’s remaining commercial lending and fees are covered by the Credit • Oct. 2015 leasing portfolios in Australia and Contracts and Consumer Finance 1st • New Zealand to Sankaty Advisors, and Amendment Act (CCCFA). The Warehouse Group buys out affiliate of US private equity group Bain Westpac’s 51% stake in The 9th Capital for an undisclosed amount. • Warehouse Financial Services Squirrel Money is issued its licence by Ltd to obtain 100% ownership of the FMA to operate as New Zealand’s the business. third P2P lender, with focus on offering • Dec. 2015 both secured and unsecured personal • 12th • 1st loans of up to $70,000. Another P2P lender, LendingCrowd, is LendMe commences operations in • 13th issued its licence by the FMA. New Zealand. Standard & Poor’s downgrades credit • 14th ratings for a number of NBDTs, MTF confirmed that Heartland including Credit Union Baywide, New Zealand would likely make an Credit Union South, First Credit Union, offer of more than $1.50 per share to Avanti Finance Ltd and Fisher & Paykel complete the takeover deal. Finance Ltd. 94 | KPMG | FIPS 2015
Lyn McMorran Executive Director Financial Services Federation Inc.
Lyn McMorran is the Executive Director of the Financial Services Federation Inc. which is the industry body representing responsible finance and leasing providers in New Zealand (www.fsf.org.nz). Prior to joining the FSF in 2012, Lyn was Area Manager for Westpac’s Private Bank in the Lower North and South Islands. A Certified Financial Planner, Lyn is a past President of the Institute of Financial Advisers of New Zealand. Lyn holds a Graduate Certificate in Management and a Post-Graduate FINANCIAL Diploma in Business Studies (Personal Financial Planning) and is a Fellow of both the Institute of Financial Advisers and the Financial Services Institute of Australasia. She is also a Trustee of the Skylight SERVICES Trust and a Commissioner for the Insurance and Savings Ombudsman disputes resolution scheme. FEDERATION FIPS 2015 | KPMG | 95
This year the Financial Services Federation (FSF), originally known as the Finance Houses Association (FHA), celebrated its 50th anniversary. A look through the archive at the driving force behind the organisation’s formation shows just how much the New Zealand economy has changed. But it also gives pause for thought about where the industry can usefully put its efforts now that the recent raft of regulation arising from the Global Financial Crisis, is largely in place.
Fundamentally the FHA’s establishment was a response to government regulatory intervention. The Finance Minister at the time, one Robert Muldoon, believed that consumers’ easy access to credit was fuelling inflation. The Government’s response was to require finance houses to freeze a portion of their funds in Government Stock to effectively control the amount they were able to lend. 96 | KPMG | FIPS 2015
The FHA was initially able to negotiate Throughout this period the sector FSF members have continued on members’ behalf for a voluntary continued to look for ways to to innovate in order to provide lump sum payment rather than a innovate and help support growth New Zealand consumers and compulsory one which equated to in New Zealand’s economy. By the businesses with finance and leasing just over 5% of their assets. It also end of the 1960s members were products that meet their changing encouraged members to look for lending not just for the purchase of needs. They are generally smaller opportunities to lend elsewhere home appliances but also for home than banks and are therefore more away from the financing of consumer improvements, purchase of motor nimble in terms of product and channel goods to the provision of funding for vehicles, overseas travel, education development in order to more quickly industrial, farming and commercial fees and medical expenses. They anticipate changing requirements. operations. had also become the most important In the Business-to-business space, providers of risk loan capital to small finance companies have and will and medium businesses. Fundamentally the FHA’s continue to play a vital role in fuelling establishment was a response to New Zealand’s economic growth government regulatory intervention. By the end of the 1960s through having a greater appetite members … had also become for risk than traditional funding the most important providers sources. This is because they are able to specialise and get closer to This was the first time finance of risk loan capital to small and the business and the sector into houses were recognised as being medium businesses. which they are lending. This in turn important to New Zealand’s money allows finance companies to take and capital markets. The high sense of a less conservative approach when responsibility shared by FHA members In the early 1970s it became possible businesses are looking to expand and was also evident. At the same time for New Zealanders to buy a new also to understand the cyclical nature the FHA successfully represented car without having to go on very of business so that they can work to the Government and the Reserve long waiting lists (except for one together for the long haul. Bank that the term “Non-Banking or two particularly popular models) Financial Institutions” should be used and members became interested in to describe their members rather supporting New Zealand’s burgeoning FSF members have continued than more negative term “fringe wine industry. to innovate in order to provide institutions”. By the early 1980s a Credit Contracts New Zealand consumers and The lending restrictions remained in Bill was proposed to replace the businesses with finance and place for most of the next 20 years and Moneylenders Act of 1908 which, until leasing products that meet their by 1984, when the Labour Government that time, had regulated consumer changing needs. was elected, financial institutions were lending in New Zealand. The FHA required to invest a whopping 30% in and the FSF have continued to be Government Stock. This meant that involved in ensuring that the various Many FSF members provide motor they were borrowing money at 14% iterations of the Credit Contracts vehicle finance or leasing products then lending a quarter of their asset legislation since then achieve the to consumers and/or business. One book to the Government for a return aims of providing appropriate levels of obvious characteristic is their passion of 11%. consumer protection without inhibiting for vehicles – they all love motor access to credit. vehicles whether they help customers to get into prestige, top-of-the range vehicles, the second hand family FIPS 2015 | KPMG | 97
car market or provide fleet leasing The FSF and its members fully support One of the ways in which the FSF opportunities to major corporates. the need to provide appropriate marked its 50 year milestone this This passion translates into a sincere levels of consumer protection and year was by releasing a Code of desire to help people and businesses sincerely hope that these regulations Responsible Borrowing which was get into the most appropriate vehicle are effective for all consumers but written in collaboration with the or vehicles for their needs and financial particularly those who are in more NZ Federation of Family Budgeting situation. vulnerable circumstances. We believe Services. The timing of this release that we have an important community also coincided with the introduction Since the GFC, FSF members have service role in reporting to the of the changes to the CCCFA and the been substantially focused on meeting regulators situations where lenders Responsible Lending Code. This Code their compliance obligations arising are less concerned with responsible suggests that borrowers consider from the “once in a generation” and ethical behaviour. We look forward all the alternatives available to them regulatory reform that necessitated. to effective enforcement action as including taking budget advice before Even before the changes to the a result. entering into a new loan contract. Credit Contracts and Consumer It also sets out the reasons why We also look forward to turning our Finance Amendment Act 2014 and responsible lenders need to ask so attention once again to innovation as the introduction of the Responsible many questions of borrowers to enable opposed to compliance. Many of our Lending Code that came into force at them to make responsible lending members give customers the choice the beginning of June this year, our decisions and why it is important for of accessing their products on-line members estimated that legislation borrowers to fully disclose their current and increasing consumer demand is such as the Financial Advisers Act situation as well as what to do if a loan driving more advances in these lending 2008, Financial Services Providers application is declined. platforms. Such platforms not only (Registration & Disputes Resolution) ensure that credit is easily accessible The FSF plans to continue to set the Act 2008, Anti-Money Laundering but have the potential to improve standards for responsible lending & Countering Financing of Terrorism compliance with responsible lending behaviour. One way is through Act 2009, Non-Bank Deposit Takers and other regulatory obligations as development of additional codes, Act 2013 and the Financial Markets more and better quality information regardless of how credit is accessed or Conduct Act 2013 (to mention only a about borrowers becomes available. what platform is used. Although these few) had cost them $30–$40 million codes might only be adhered to by in systems and process changes and Clearly one recent innovation that those finance providers who voluntarily professional advice. This estimate has caught everyone’s attention subscribe to them by being FSF does not include the human resource is the introduction of Peer to Peer members, we believe that we have an and lost opportunity cost which would lending which is already enjoying important role to play in establishing require that amount to be multiplied strong uptake and which can only be what responsible behaviour is so that many times over. expected to continue to grow. consumers can have certainty that the lender they are dealing with will treat The FSF and its members fully One of the ways in which the FSF them ethically. support the need to provide marked its 50 year milestone this appropriate levels of consumer year was by releasing a Code of protection. Responsible Borrowing. 98 | KPMG | FIPS 2015
Non-banks – Sector performance
The non-bank sector $MILLION 350 experienced a 6.67% 45 contraction in overall reported 300 MOVEMENT 250 net profit (see Table 14), IN NET PROFIT down by $18.20 million to AFTER TAX 200 $254.62 million this year. 150 However, upon a closer look 100 at the financial results, the 50
performance of the entities 0 is mixed, with half of the 2014 NET NON- OPERATING IMPAIRED TAX 2015 NET PROFIT INTEREST INTEREST EXPENSES ASSET EXPENSE NET PROFIT participants having actually AFTER TAX INCOME INCOME EXPENSE AFTER TAX improved their bottom line. Notably all but one of the Easing in profitability the slightly weaker interest margin. deposit takers enjoyed better First Mortgage Trust, whom we Over half the participants improved profit results this year. welcome to the survey, achieved a their profitability. Notably, Fisher & 32.10% or $3.29 million increase in net Paykel Finance contributed with a profit this year, attributable to 22.30% reported 42.06% or $7.13 million revenue growth. increase in net profit. However, due to change in reporting dates of Fisher & Declines in profitability were led Paykel Finance the comparatives used by Toyota Finance, Fuji Xerox and for this analysis cover a nine month GE Capital with reported profits period thus distorting results. Fisher down by 55.47%, 73.30% and & Paykel Finance has undergone 9.95% respectively, accounting for significant changes this year before a combined decrease in profits of being sold to ASX-listed FlexiGroup. $33.66 million. Toyota Finance was UDC Finance also reported a 10.68% negatively impacted by a $13.38 million increase in net profit, contributing unfavourable fair value movement $5.51 million to overall results, driven arising due to changes in interest by 8.79% revenue growth and reduced rates. For Fuji Xerox the decline in net operating expenses compensating for profit was in part due to the prior year
TABLE 14 Total Increase in Total Assets 4.32% Decrease in Net Profit After Tax -6.67% Movement of Impaired Asset Expense (Percentage of Loans and Advances) bps -5 Decrease in Interest Margin bps -32
FIPS 2015 | KPMG | 99
$MILLION % IMPAIRED ASSET ANALYSIS 46 140 1.75 120 1.50
100 1.25
80 1.00
60 0.75
40 0.50 IMPAIRED ASSET EXPENSE (LHS) IMPAIRED ASSET EXPENSE/AVERAGE LOANS 20 0.25 AND ADVANCES (RHS) 0 0.00 2011 2012 2013 2014 2015
$MILLION GROSS IMPAIRED AND PAST 250 47 DUE ASSETS 225
200 175
150
125
100
75 GROSS IMPAIRED ASSETS 50 PAST DUE ASSETS TOTAL PROVISION 25 0 2011 2012 2013 2014 2015
$BILLION LENDING BY NON-BANK 14 48 LENDING INSTITUTIONS 12
10
8
HOUSING 6 CONSUMER 4 AGRICULTURE PROPERTY 2 OTHER BUSINESS 0 SOURCE: RESERVE BANK FCR NOVEMBER 2015 2011 2012 2013 2014 2015 100 | KPMG | FIPS 2015
result having a $3.61 million fair value • net interest income has increased from 5.48% in 2014 to 5.30% in 2015 gain on derivatives. Margin pressures by $23.36 million despite interest relative to revenue. were felt by most participants, with margins decreasing by 32 bps (see 14 of the 23 participants experiencing profitability measures on page 115), declining margins, this was despite the with balance sheet growth being 46 SEE FIGURE 46 – PAGE 99 majority of participants growing their the driver; revenues by 6.07% or $98.08 million • non-interest income was up by this year. $10.26 million; • Deposit takers within the survey • asset impairment expense was up appear to have had a good year, Over half the participants improved by $2.30 million (see Figure 46); each having managed to reduce their profitability. • operating expenses increased by their impairment charges and $48.49 million (see Figure 51); and having collectively achieved an • tax expenses increased by overall reduction of $1.74 million in Non-interest income showed a $1.09 million. asset impairment expense. Most 3.04% improvement, contributing an other participants maintained their impairment charges at levels broadly additional $10.26 million for the sector. Asset quality continues to This was again attributable to Ricoh consistent with the prior year. The generating $12.23 million from its non- be strong largest increases in impairment financing business selling equipment Impairment was one of the good charges were reported by Fisher and services. Fisher & Paykel reported news stories shared by the Executives & Paykel Finance of $4.95 million, $6.75 million more in fee income surveyed, all of whom felt that followed by a $2.27 million increase and premium revenue mostly due to impairment continues to be at historic reported by Mercedes Benz Financial comparatives being for nine months. lows with no significant concerns Services. As far as improvements, This was offset by a $13.38 million experienced this year. However, BMW Financial Services led the unfavourable fair value movement on Executives surveyed are all aware way with a $1.84 million reduction, derivatives for Toyota Finance. that they are ”in the very best part of followed by UDC Finance down by the cycle” and that they need to be $1.31 million and Fuji Xerox Finance Overall the non-bank sector has still mindful of this when writing new deals down by $1.02 million. The relatively delivered plenty of positives this year. and many are watching keenly for any small movements in impairment Increased competition has done little early indicators of a downturn. charges are testament of an industry to impact continued momentum in that has enjoyed a generally positive asset growth supported by abundant year in terms of asset quality, and a liquidity. While improving consumer Survey participants in the motor vehicle market where residual values and business confidence, further vehicle financing segment continue remain strong. restrictions on banks’ ability to lend, to show good improvements in Survey participants in the motor and recent market activity have all impairment asset expenses. been perceived as promising of more vehicle financing segment continue growth opportunities in this sector. to show good improvements in impairment asset expenses, as Although the impairment expense When looking at the main income three of the six motor vehicle has gone up by 2.61% to reach statement categories the following can financing companies managed to $90.74 million for the non-bank be seen: reduce their impairment charges, sector (see Figure 46), largely driven with the $2.95 million reduction by “collective” provision increases, in impairment across these three this has been in line with revenue companies accounting for over a third 45 SEE FIGURE 45 – PAGE 98 and asset growth, with levels of of the total reduction in impairment • impairment charges actually improving
FIPS 2015 | KPMG | 101
$MILLION NET INTEREST INCOME 1,200 49 ANALYSIS 1,000
800
600
400 INTEREST INCOME (LHS) INTEREST EXPENSE (LHS) 200 NET INTEREST INCOME (LHS) 0 2011 2012 2013 2014 2015
$MILLION % GROSS LOANS AND 12,500 9.00 50 ADVANCES VS INTEREST MARGIN 10,000 8.00
7,500 7.00
5,000 6.00
2,500 5.00 GROSS LOANS AND ADVANCES (LHS) INTEREST MARGIN (RHS) 0 4.00 2011 2012 2013 2014 2015
$MILLION % OPERATING EXPENSES VS 700 70.0 51 OPERATING EXPENSES/ OPERATING INCOME 600 60.0
500 50.0
400 40.0
300 30.0
200 20.0 OPERATING EXPENSES (LHS) OPERATING EXPENSES/ 100 10.0 OPERATING INCOME (RHS) 0 0.0 2011 2012 2013 2014 2015 102 | KPMG | FIPS 2015
charges achieved this year. Comments Total assets continue to The ongoing expansion and growth from Executives surveyed suggest grow in loan books coincides with the these improvements are stemming general sense of optimism coming The sector continues to achieve good from strong motor vehicle residual from both participants in the sector asset growth with total assets up a values and better quality borrowers and their clients. This is confirmed further 4.32% (see Table 14), being in the new car market space where by recently reported increases in an additional incremental increase they operate. business and consumer confidence on 11.48% growth in the previous with firms’ expectations of their Trends in gross impaired assets year. Total sector assets now total own activity, profits, intentions of continued to show improvement $11.78 billion. Asset growth was investment, employment, export and and have now reduced for the sixth underpinned by growth in loans and residential investments all on the rise, consecutive year. The $21.83 million advances that has been prevalent and then continues to be reflective reduction in the gross impaired assets across the sector, with 19 of the of a domestic economy performing (see Figure 47) has been mostly 23 participants surveyed having grown comparatively well when compared to attributable to First Mortgage Trust their loan books. Latest RBNZ data the uncertainties persisting in global reducing their gross impaired assets shows growth in non-bank sector economies. Confidence and sentiment by $13.17 million and Fisher & Paykel lending for two consecutive years, are as important drivers for the sector Finance by $8.38 million. with loans reaching $10.98 billion as business fundamentals. in September 2015, up from $10.52 billion in the previous year (see Strengthening competition and new 47 SEE FIGURE 47 – PAGE 99 Figure 48). entrants chasing market share led to some marginal loss in market share of gross loans and advances observed • SEE FIGURE 48 – PAGE 99 for the three largest entities, namely 48 Impairment provisioning showed a GE Capital, UDC Finance and Toyota similar improvement, with the level of Finance experiencing declines by impairment provisions relative to gross • 1.42%, 0.80% and 0.97% respectively. loans and advances reducing from Most notable were Nissan Financial The combined market share of gross 1.87% in 2014 to 1.74% in 2015, close Services, whom we welcome to the loans and advances for these entities to the 1.64% seen in 2013. Impaired survey this year, with a 150.28% fell from 55.37% to 52.17% of the asset expense over gross loans and increase. Nissan Financial Services total group surveyed. Most other advances also improved from 1.01% in has been newly established and is still participants managed to maintain their 2014 to 0.96% in 2015, down by 5 bps building its loan books with lending market share at broadly consistent per Table 14 and Figure 46. related to the Nissan dealerships and levels, while Nissan Financial Services their sales and other needs. Avanti stood out gaining 1.19% of the market Finance achieved 43.86% growth in this survey year. 46 SEE FIGURE 46 – PAGE 99 and Fuji Xerox grew 24.24%. Among these entities, total gross loans and In an industry that continues to advances grew an accumulated present good growth opportunities, • $253.68 million. the risks of margin pressure and overcrowding poses ongoing concerns as participants all commented on the importance of positioning 50 SEE FIGURE 50 – PAGE 101 themselves in their area of expertise in order to strategically stay ahead of • the competition. FIPS 2015 | KPMG | 103
Net interest margin TABLE 15: Gross Loans 2015 2014 Movement Movement The non-bank sector has achieved an Entity $’000 $’000 $’000 % impressive 8.09% growth in interest income for the year (see Figure 49). Avanti Finance Limited 152,977 106,340 46,637 43.86% BMW Financial Services 369,427 349,725 19,702 5.63% New Zealand Limited 49 SEE FIGURE 49 – PAGE 101 Credit Union Baywide 215,041 197,262 17,779 9.01% • Credit Union South 93,867 82,709 11,158 13.49% However, when excluding the impact of Fisher & Paykel Finance’s 37.25% First Credit Union 183,340 143,726 39,614 27.56% increase in interest income due to First Mortgage Trust 219,436 187,223 32,213 17.21% comparatives being for a nine month reporting period, the overall uplift in Fisher & Paykel Finance Group 656,469 615,921 40,548 6.58% interest income was 5.71%, which Fuji Xerox Finance Limited 438,111 352,620 85,491 24.24% largely corresponds to 6.63% growth in loan books (see Table 15 – page 103) GE Capital 2,008,749 2,014,279 -5,530 -0.27% offset by the effects of falling interest rates. The non-bank sector has Instant Finance Limited 92,210 83,777 8,433 10.07% experienced a decline in interest John Deere Financial Limited 144,510 129,246 15,264 11.81% margins for the second consecutive year, with a 32 bps decrease down to Medical Securities Limited 159,464 169,537 -10,073 -5.94% 6.62% (see Table 16 – page 105 and Mercedes-Benz Financial Figure 50 ). This has been reflective 513,722 448,497 65,225 14.54% of comments made by Executives Services New Zealand Limited surveyed. Motor Trade Finance Limited 517,250 489,293 27,957 5.71% Nelson Building Society 361,227 318,826 42,401 13.30% 50 SEE FIGURE 50 – PAGE 101 Nissan Financial Services NZ 202,437 80,885 121,552 150.28% Pty Limited • ORIX New Zealand Limited 35,614 33,046 2,568 7.77% Wholesale debt funding costs continued on a downward trend and Police & Families Credit Union 64,400 63,746 654 1.03% the OCR is close to historic lows at 2.75% after three consecutive rate Ricoh New Zealand Limited 94,060 88,487 5,573 6.30% cuts this year. The RBNZ is indicating The Warehouse Financial 64,664 67,945 -3,281 -4.83% the possibility of further cuts. Due Services Limited to the timing of OCR rises in 2014 followed by reversals of the same in Toyota Finance New Zealand 720,654 765,330 -44,676 -5.84% 2015 and the differing reporting periods Limited amongst participants, there were mixed trends in interest costs in the UDC Finance Limited 2,378,692 2,303,886 74,806 3.25% current survey period. Overall interest Wairarapa Building Society 104,013 88,936 15,077 16.95% expenses showed an increase of 17.87% (see Figure 49), attributable in Total 9,790,334 9,181,242 609,092 6.63% 104 | KPMG | FIPS 2015
part to a 3.26% increase in interest Executives surveyed also indicated derivatives. While Nissan Financial bearing liabilities and in part to some there has been some degree of relief Services reported operating expenses financials still reflecting 2014 OCR in terms of banks being less flexible at 19.80% of gross revenues which rises. Commenting on these interest with the black box lending criteria appears to be well below the average rate movements Executives raised the and focusing on the < 80% LVR and across the group of 38.98%. However, importance of timely adjustments of corporate and commercial space. the current level of operating expenses deposit rates to protect margins, being Banks have however been noted may not be indicative of longer term balanced with manageable sources as having a willingness to provide trends as Nissan Financial Services and tenors of funding. wholesale or securitised funding to is still in the process of establishing non-bank lenders, in effect indirectly its operations. On the interest income side of the lending to their customers through equation, the Executives commented Overall, the sector appears to be the entity while taking some comfort on considerable competitive pressures running at an efficient rate with from the capital in the non-bank on lending rates with new entrants, increases in operational costs lender as opposed to lending to the growing presence of disruptors and supported to a large extent by sector directly. One example being banks intermittently dipping into rises in operating income. This has Credit Union South having entered this space offering very competitive been encouraging to see given the into a securitisation programme rates all having an impact. The largest challenges in managing operating with Westpac to be implemented decreases observed in interest costs down posed not only by rising in November 2015 that will provide margins were experienced by Avanti competitive pressures to attract access to $50 million in additional Finance, John Deere Financial and and maintain business, but also the funding, and another being Avanti Fuji Xerox Finance with movements significant ongoing costs associated Finance’s growth of its mortgage book of 307 bps, 147 bps and 136 bps with regulatory compliance. From through similar mechanisms. respectively (see Table 16 – page 105). discussions held with participants, For Avanti Finance the interest margin there continues to be a clear and was impacted by the timing of new Operating expenses on consistent message that regulatory lending (a percentage of which was the rise requirements are posing substantial mortgage based) that contributed to The non-bank sector has experienced costs and remain the key driver 43.86% growth in its lending book this an overall 8.14% or $ 48.49 million behind operating cost increases. year. Fuji Xerox Finance experienced increase in operating expenses (see Despite this the view of regulation its interest margin impacted by its Figure 51). The operating expenses to and its impact has softened now 24.24% growth in its loan book. operating income ratio also increased that its implementation is behind from 56.53% in 2014 to 59.23% in many entities and it is absorbed into Competitive pressures continue to be 2015 (see Figure 51). the business as usual, as much as evident in the yield (interest income possible. Some commented it may to average interest earning assets have cleaned the industry up, raised ratio), which eased by 2 bps from the bar and is seen to be an extra the previous year to 10.35%, which 51 SEE FIGURE 51 – PAGE 101 hurdle for new entrants. is the lowest it has been since 2010 at 10.27%. • The levels of operating expenses Many Executives commented that the relative to gross revenues have earlier loan-to-value (LVR) rules had remained broadly consistent overall created opportunities for the non- at 37.60% compared to 36.88% last bank lenders around the periphery year. For Fuji Xerox Finance, operating of the banks’ “black box”, as banks expense levels were adversely were prevented or chose not to do all impacted by a $4.51 million loss on > 80% LVR deals. Comments from FIPS 2015 | KPMG | 105
TABLE 16: Movements in Interest 2015 2014 Movement Margin % % (bps) Avanti Finance Limited 10.94 14.01 -307 BMW Financial Services New Zealand 7.29 7.52 -23 Limited Credit Union Baywide 5.16 5.29 -13 Credit Union South 8.08 8.56 -47 First Credit Union 4.57 4.15 42 First Mortgage Trust n/a n/a n/a Fisher & Paykel Finance Group 11.01 8.76 225 Fuji Xerox Finance Limited 4.17 5.53 -136 GE Capital 8.52 9.07 -55 Instant Finance Limited 21.25 20.83 42 John Deere Financial Limited 3.57 5.04 -147 Medical Securities Limited 3.70 3.51 19 Mercedes-Benz Financial Services 4.23 4.56 -33 New Zealand Limited Motor Trade Finance Limited 9.06 9.41 -35 Nelson Building Society 2.57 2.50 7 Nissan Financial Services NZ Pty 3.59 n/a n/a Limited ORIX New Zealand Limited 12.35 12.59 -24 Police & Families Credit Union 4.78 4.58 19 Ricoh New Zealand Limited 8.30 8.76 -46 The Warehouse Financial Services 11.99 12.02 -3 Limited Toyota Finance New Zealand Limited 4.43 5.17 -74 UDC Finance Limited 4.87 4.90 -2 Wairarapa Building Society 2.22 2.22 1 Sector Average 6.62 6.94 -32 n/a = not available 106 | KPMG | FIPS 2015
P2P lending
The P2P lenders business model view would ensure that there was is different from that of current performance across the board and In recent times there has market participants captured by our credit issues were minimised. All been increased press about survey. Historically we have looked involved had the common bond of the at the financial statements of entities community, company or workforce. the growth and impact of that have interest income, interest In some ways a P2P lender is the peer-to-peer (P2P) lending in expense, fee income, other costs, modern version (60+ years newer) capital, deposits and various types of those older entities with more the New Zealand Financial of lending together with the inherent technology, more immediacy, but just Services market. levels of impairment in the market. like the Credit Union, Building Society P2P lenders are significantly different or Mutual, when they launched, the as they are a platform that brings P2P offer a different platform. The Two P2P platforms Harmoney together willing investors and willing reasons this has occurred now is the and Squirrel Money have borrowers, but the business itself massive leap forward in technology, (platform) does not take on the credit in particular the ability to analyse, launched and two more, risk, and therefore, neither the funding compare and use large quantities of LendingCrowd and LendMe or the advances are recorded on the data, the ability to host the platform are shortly to launch. But Why P2P lender’s balance sheet. Unlike on a website all can access such Finance Companies and Credit Unions, that it can instantly achieve national all this activity now, and What investors are unable to see the overall reach and to a lesser degree, some is a P2P lender, and Where do picture of the income and expenditure, frustration and dissatisfaction with debt and advances, capital and liquidity existing financial institutions and the they fit within our survey? of the entire platform via a set of willingness of people to adopt a new financial statements. P2P lending and different business model. Just like is a true social interaction between Uber in the taxi market and Amazon independent investors and borrowers in the retail market, P2P lenders have with the platform simply facilitating offered a newer faster more agile and their getting together, but not taking technologically savvy way of achieving a principal position or standing any the same goals that are both time credit risk and so not recording the saving and with potentially better transaction in the traditional way. outcomes for the consumers.
So the question is, Why is this How the models work happening now? Two things have made P2P lending possible in its new Broadly, the technology platforms form, but before we look at why this is run over the web introduce people possible now, P2P lending is not new. with excess funds who wish to invest and earn a higher return than In many ways Credit Unions, Building a current market participant would Societies and Mutuals were similar. offer, an opportunity to be matched People from a similar community, with borrowers who wish to borrow. company or workforce who had It may be that those borrowers want money, would invest it to allow those access to a simple and fast loan from the same community, company without having to go through all of or workforce to borrow. The theory the perceived hurdles of a bank or a was those investing would earn a finance company loan. Alternatively, slightly better rate than the banks over the longer term they may wish could offer and those borrowing to have a slightly lower borrowing rate would borrow at a slightly more or just wish to spread their dealings favourable rate and the holistic societal with financial institutions. The platform FIPS 2015 | KPMG | 107
basically matches the parties across a of funds as they are repaid or a share range of criteria such as interest rates, of the interest rate received. Under the maturity and payment amounts. There fractionalisation model, in the event of are many models, two of the more default by a borrower, the investor will common are the ones based around suffer some (fraction) of the loss. the idea of fractionalisation and the The other model commonly referred to idea of a reserve balance. as the reserve model is similar in the sense that investors are matched to There are many models, two of the borrowers but this may occur on more more common are the ones based of a one to one or one to a few basis around the idea of fractionalisation as opposed to forced fractionalisation and the idea of a reserve balance. in terms of investors to loans. In this example, the investor will receive a return based on the level of risk In the fractionalisation model investors say 12.5% they wish to accept, e.g. invest an amount, say $5,000, and this they might receive a return of 8.0%. John Kensington amount is matched to say 10 loans The platform may charge a portion Partner – Audit where each contribution to those loans of interest say another 2.0% for the Head of Financial Services will be, say $500. In this example, service/access to the platform (as KPMG the investors’ risk in relation to the with the fractionalisation model) return of the $5,000 is spread across with another portion going to the 10 different borrowers and each of reserve, say 2.5%. In the reserve those borrowers in turn is funded by model situation, the full amount of any John has been with KPMG’s (potentially) 10 different investors. This payment (principal and interest) is split Financial Services audit team for 30‑plus years, 17 of these as a is the principle of fractionalisation. firstly to the investor, secondly to the platform and thirdly to a reserve. The partner working across a wide The platform might be remunerated reserve is built up such that it is able range of financial services audit by some form of upfront fee (say a to absorb potential losses. In some clients, specialising in banks and percentage of the amount lent) and situations, an amount is seeded into finance companies. may take some slice of the total the reserve by the platform owner to interest paid, i.e. the total interest John has a wealth of experience in create an underlying reserve greater paid by the borrower might consist auditing and accounting for banking than the current potential credit loss. of a return to the investor and a products and services including In these situations where a loan stops margin for the platform. In this model, treasury, retail offerings, corporate making payment, the reserve fund is fractionalisation is one of the two ways loans and loan provisioning. He available to make that good until such in which the credit risk is managed. is currently Head of KPMG’s time as the borrower starts paying Financial Services team, Financial The first way that the credit risk is again in which case the payments will Services Audit and editor of this managed (in both models) is that be diverted back to the reserve fund to publication. John is also a Trustee each loan is graded and investors, by top it up again. In the event of a severe of the Kidscan Charitable Trust, selecting the rate of the return they credit downturn, and the reserve deputy chairman of the New Zealand want, effectively accept the credit being drawn on heavily there is often Auditing and Assurance Standards risk relative to that grading. If the a facility for the return component to Board (NZAuASB). John is also a investor chooses a loan with a 12.5% the investor to be reduced across the member of CAANZ and the Institute interest rate they might receive that board, such that all borrowers wear a of Directors. interest rate less any fee or share reduced return and effectively share for the platform (assume 2.0%) and in the credit loss until borrowers can thus receive 10.5%. The platform may return to normal. receive remuneration either as a share 108 | KPMG | FIPS 2015
Target areas of scale and access to significant market participants feel they are bound amounts of cheap funds. This makes by all the regulation of other borrowers What areas will P2P lending target? them able to compete strongly in low and lenders, but already questions Those that have launched in yield sectors of the market such as have arisen, as they do with any new New Zealand appear to be targeting a corporate lending, SME lending and regulation, as to whether other Acts range of areas, but they are typically retail mortgages. The types of sectors apply, questions have been raised as to areas where the P2P lender does not that will come under increasing whether CCCFA and the Responsible have to compete with the banks’ or pressure from P2P lenders will be Lending Code are applicable in finance companies’ main strength the higher margin areas such as this space. areas or where those entities tend credit cards and personal loans and to be less dominant in the market. potentially higher LVR mortgages. These are also typically areas where The future incumbent entities enjoy a higher The P2P lenders that have launched margin and there is some ability to Regulation so far in New Zealand are quite reduce the cost to the borrower and What regulation are the P2P funders different. Harmoney have targeted a increase the return to the investor bound by? strong growth launch and has been because of the wider margins. Banks assisted by having some cornerstone The FMA website clearly sets out the and finance companies in particular, shareholders and wholesale money requirements for a P2P lender and are well suited to large economies available to support its fast launch.
RESERVE FUND FRACTIONALISING RESERVE FUND for the benefit of all investors
2.5%
Similar borrower 2.5% risk 12.5% RESERVE PLATFORM + FUND MARGIN 10.0% PLATFORM MARGIN
Investor Investor return 8% return 10% (fewer (many investors investors per loan) per loan) FIPS 2015 | KPMG | 109
Squirrel Money has gone for a from what you would expect and then So are there any other elements slower approach matching its lending the investor demographic similarly is that are different from a normal to its funding and is looking to be quite different. Many looking in from financial institution? the true mum and dad P2P lender. the outside might assume that the One is the element of buyer beware. LendingCrowd and LendMe have yet investor demographic would typically These platforms match investors and to launch or have just launched as this be those who are a bit older, have a borrowers but don’t take the risk. goes to press and it will be interesting little bit of excess cash and want to They clearly disclose the level of risk to see how they approach the market have another provider; and perhaps involved and to some extent there in due course. put into the platform a small amount is an element of buyer beware for of their accumulated wealth until such P2P lending is here in the New Zealand the investor. An investor needs to time as the platform proves itself. market and operating. How we capture understand that by investing in a loan While there may be many investors its impact in the survey long term, will that will return them 12.5% they have of this nature, this is not typically be both interesting and challenging a significantly greater risk of loss than the person involved as an investor. and a little dependant on what and a loan or deposit with a bank at 3.0%. Similarly, on the borrower’s side, many how they report the results of the There is an assumption that those might have felt that the borrowers platform. Currently P2P platforms are dealing with this understand the risk will be young, restless and looking for not required to report the traditional reward relationship. some funding they can’t achieve from financial information in the sense the bank, again this is not necessarily a Another matter that has yet to be of a set of financial statements that correct assessment. tested is the secondary market. show interest income, expenses, Should investors want to exit their other expenses, deposits, advances So what is different about these investment, is there a secondary and impairment that this survey has operations? market that allows them to be taken traditionally covered. As more P2P out? To date this has not formed but lenders come to the market, we will Firstly, the use of data. These again it is only a matter of time before look to see what metrics are available enterprises are data hungry and what something occurs in this space. to provide a useful and meaningful they do is based around automation of comparison of their performance. At processes without human intervention So P2P lending is an exciting new the same time, we will need to be (to some extent this still remains). addition to the financial services mindful that information included in They look to use the data and the industry and it is something that the survey will need to be of a robust information within the data to make we will no doubt follow up on in the second part of the survey when we and audited nature. decisions based on where a person is at, what a person likes and what a talk to the banks. So what are the lessons learnt and person needs while considering what One of the comments made by sector what does the future hold for P2P a person has just done and is likely to participants is that the P2P lenders lending? do. One of the key drivers of these have launched at a relatively benign platforms is the ability to use data From the discussion that we have had time. Interest rates are at an all time effectively and efficiently. with the P2P lenders which have set low, employment numbers are strong and NZ’s economy is as good as any in up, a number of interesting myths So what is the typical P2P lending the world. Many feel the real test for have been debunked and a number platform? of competitive advantages and also the P2P lenders will be when they go ‘watch this space’ opportunities have It is a technology offering that offers a through a down part of the cycle and been identified. cost advantage and speed advantage pressure comes on the accuracy of to those that are willing to try out new their credit modelling and/or a liquidity Firstly, it is very clear that the borrower technology just like those who tried event occurs. This will be a very demographic is probably quite different Amazon and those who have tried real test of the P2P sub-sector, and Uber. This is a new way of doing an whether its investors understand the old thing. risk reward equation and whether the credit modelling is correct. 110 | KPMG | FIPS 2015 FIPS 2015 | KPMG | 111 Looking back at the non-bank sector
2011 2012 2013 2014 2015
BMW Financial Services Fuji Xerox Finance John Deere Finance Instant Finance Motor Trade Finance Mercedes-Benz Financial Services Medical Securities ORIX The Warehouse Financial Services Toyota Finance UDC Finance (above threshold Avanti Finance for inclusion) Avanti Finance Fisher & Paykel Finance 12
FINANCE GE Finance & Insurance Market under 13 one brand GE Capital Custom Fleet NZ (First year of Nissan Financial participation Services NZ Pty in survey) Nissan FSNZPL (First year of participation Ricoh in survey) Ricoh Acquired by PGG Wrightson Finance Heartland
New Zealand NON-BANKS MARAC Finance
Obtained Heartland banking New Zealand license Southern Cross Building Society Credit Union North Amalgamated into First Credit Union First Credit Union (First year of participation First Mortgage Trust in survey) First Mortgage Trust Obtained PSIS banking SAVINGS license
Credit Union Baywide Credit Union South Police & Families Credit Union Nelson Building Society Wairarapa Building Society
112 | KPMG | FIPS 2015 Non-banks – Analysis of annual results
Size and Strength Measures Growth Measures Net Loans and Increase in Net Profit Increase in Increase in Total Rank by Balance Survey Total Assets Net Assets Gearing Number of Entity Advances After Tax Underlying Profit Assets Total Assets Date Year $000 $000 % Employees $000 % % % 16 31-Mar 2015 158,614 25,633 16.16 148,874 75 -15.87 -16.16 45.61 Avanti Finance Limited 2014 108,927 20,741 19.04 102,622 63 10.49 10.42 17.90 9 31-Dec 2014 376,204 18,645 4.96 361,500 18 17.65 18.32 4.59 BMW Financial Services New Zealand Limited 2013 359,711 21,195 5.89 342,572 17 5.99 5.57 17.03 12 30-Jun 2015 266,031 36,669 13.78 213,588 106 0.23 0.23 5.56 Credit Union Baywide 2014 252,021 34,943 13.87 195,776 103 41.41 41.41 10.19 19 30-Jun 2015 124,749 20,748 16.63 92,945 94 130.47 130.47 10.51 Credit Union South 2014 112,885 19,877 17.61 81,526 93 111.36 111.36 4.45 10 30-Jun 2015 295,007 49,955 16.93 180,613 108 57.98 57.98 18.37 First Credit Union 2014 249,216 39,994 16.05 141,419 93 -11.53 -11.53 7.68 11 31-Mar 2015 277,951 276,174 99.36 218,586 n/d 32.10 34.66 24.84 First Mortgage Trust 2014 222,654 221,189 99.34 183,703 n/d n/a n/a n/a 4 31-Dec 2014 753,399 80,000 10.62 639,236 230 42.06 42.05 6.89 Fisher & Paykel Finance Group 2013 704,808 89,346 12.68 598,262 239 -31.89 -31.70 -4.52 8 31-Mar 2015 452,025 40,965 9.06 437,476 n/d -73.30 -59.80 25.10 Fuji Xerox Finance Limited 2014 361,341 37,014 10.24 350,969 n/d 138.23 27.55 22.02 1 31-Dec 2014 2,599,989 435,340 16.74 1,951,341 764 -9.95 -10.03 -8.10 GE Capital 2013 2,829,296 372,410 13.16 1,955,746 785 809.65 1,569.07 6.96 22 31-Mar 2015 96,643 25,771 26.67 88,490 140 11.48 10.99 9.17 Instant Finance Limited 2014 88,529 24,415 27.58 80,622 140 1.28 0.29 2.77 18 31-Oct 2014 150,733 14,765 9.80 144,510 n/d -28.17 -28.06 11.17 John Deere Financial Limited 2013 135,584 12,603 9.30 129,246 n/d 42.52 42.60 13.32 15 31-Mar 2015 197,815 38,188 19.30 159,161 27 -39.22 -39.17 -2.49 Medical Securities Limited 2014 202,860 37,170 18.32 169,016 31 -10.24 -8.75 -7.46 Mercedes-Benz Financial Services 6 31-Dec 2014 521,923 35,841 6.87 504,549 n/d -10.03 -11.01 12.42 New Zealand Limited 2013 464,252 37,481 8.07 441,943 26 -1.85 -4.53 17.56 5 30-Sep 2015 566,501 82,621 14.58 512,151 52 13.01 11.16 4.73 Motor Trade Finance Limited 2014 540,910 80,676 14.91 484,421 51 -24.82 -22.67 22.94 14 31-Jul 2015 206,839 2,395 1.16 201,212 n/d 2,435.19 1,894.19 134.75 Nissan Financial Services NZ Pty Limited 2014 88,111 1,134 1.29 80,885 n/d n/a n/a n/a 7 31-Mar 2015 459,705 30,723 6.68 360,477 37 17.51 16.95 10.98 Nelson Building Society 2014 414,210 26,155 6.31 317,966 36 42.96 43.18 10.10 13 31-Mar 2015 236,893 147,342 62.20 35,126 64 -5.33 -5.27 3.19 ORIX New Zealand Limited 2014 229,576 131,810 57.41 32,316 63 0.81 0.66 2.10 21 30-Jun 2015 108,829 19,320 17.75 64,284 13 26.30 26.25 10.56 Police & Families Credit Union 2014 98,434 17,284 17.56 63,598 13 33.44 33.55 9.70 17 31-Mar 2015 153,421 56,542 36.85 94,060 370 -23.49 -26.61 12.50 Ricoh New Zealand Limited 2014 136,379 49,532 36.32 88,487 369 0.58 13.38 17.85 23 30-Sep 2014 79,306 12,358 15.58 62,152 3 -4.88 -4.90 -3.92 The Warehouse Financial Services Limited 2013 82,543 12,621 15.29 65,377 3 -5.37 -5.35 -9.14 3 31-Mar 2015 1,129,650 142,521 12.62 698,954 89 -55.47 -53.15 -0.81 Toyota Finance New Zealand Limited 2014 1,138,884 158,378 13.91 742,441 84 114.73 92.94 8.72 2 30-Sep 2015 2,440,613 365,462 14.97 2,347,163 145 10.68 10.53 3.66 UDC Finance Limited 2014 2,354,448 341,412 14.50 2,272,081 144 19.94 20.29 8.42 20 31-Mar 2015 124,537 16,128 12.95 103,870 9 -62.54 8.79 9.09 Wairarapa Building Society 2014 114,160 16,006 14.02 88,849 9 133.88 11.11 10.38 2015 11,777,377 1,974,105 16.76 9,620,318 2,344 -6.67 -4.63 4.32 Sector Total 2014 11,289,739 1,803,386 15.97 9,009,843 2,361 110.50 52.86 11.48
31-Dec 2014 107,738 45,534 42.26 83,013 n/d -71.06 -64.90 -19.75 GE Commercial Finance NZ 2013 134,247 45,003 33.52 42,270 n/d 111.89 37.81 -4.55 31-Dec 2014 17,873 63 0.35 10,153 n/d 70.15 103.31 1.86 GE Commercial Finance US (NZD) 2013 17,546 612 3.49 13,416 n/d -1,846.02 -4,429.54 8.79 31-Dec 2014 2,474,378 389,743 15.75 1,858,175 n/d -9.92 -10.95 -7.59 GE Finance and Insurance 2013 2,677,503 326,795 12.21 1,900,060 n/d 307.61 300.67 91.21 n/a = not available; n/d = not disclosed
FIPS 2015 | KPMG | 113
Size and Strength Measures Growth Measures Net Loans and Increase in Net Profit Increase in Increase in Total Rank by Balance Survey Total Assets Net Assets Gearing Number of Entity Advances After Tax Underlying Profit Assets Total Assets Date Year $000 $000 % Employees $000 % % % 16 31-Mar 2015 158,614 25,633 16.16 148,874 75 -15.87 -16.16 45.61 Avanti Finance Limited 2014 108,927 20,741 19.04 102,622 63 10.49 10.42 17.90 9 31-Dec 2014 376,204 18,645 4.96 361,500 18 17.65 18.32 4.59 BMW Financial Services New Zealand Limited 2013 359,711 21,195 5.89 342,572 17 5.99 5.57 17.03 12 30-Jun 2015 266,031 36,669 13.78 213,588 106 0.23 0.23 5.56 Credit Union Baywide 2014 252,021 34,943 13.87 195,776 103 41.41 41.41 10.19 19 30-Jun 2015 124,749 20,748 16.63 92,945 94 130.47 130.47 10.51 Credit Union South 2014 112,885 19,877 17.61 81,526 93 111.36 111.36 4.45 10 30-Jun 2015 295,007 49,955 16.93 180,613 108 57.98 57.98 18.37 First Credit Union 2014 249,216 39,994 16.05 141,419 93 -11.53 -11.53 7.68 11 31-Mar 2015 277,951 276,174 99.36 218,586 n/d 32.10 34.66 24.84 First Mortgage Trust 2014 222,654 221,189 99.34 183,703 n/d n/a n/a n/a 4 31-Dec 2014 753,399 80,000 10.62 639,236 230 42.06 42.05 6.89 Fisher & Paykel Finance Group 2013 704,808 89,346 12.68 598,262 239 -31.89 -31.70 -4.52 8 31-Mar 2015 452,025 40,965 9.06 437,476 n/d -73.30 -59.80 25.10 Fuji Xerox Finance Limited 2014 361,341 37,014 10.24 350,969 n/d 138.23 27.55 22.02 1 31-Dec 2014 2,599,989 435,340 16.74 1,951,341 764 -9.95 -10.03 -8.10 GE Capital 2013 2,829,296 372,410 13.16 1,955,746 785 809.65 1,569.07 6.96 22 31-Mar 2015 96,643 25,771 26.67 88,490 140 11.48 10.99 9.17 Instant Finance Limited 2014 88,529 24,415 27.58 80,622 140 1.28 0.29 2.77 18 31-Oct 2014 150,733 14,765 9.80 144,510 n/d -28.17 -28.06 11.17 John Deere Financial Limited 2013 135,584 12,603 9.30 129,246 n/d 42.52 42.60 13.32 15 31-Mar 2015 197,815 38,188 19.30 159,161 27 -39.22 -39.17 -2.49 Medical Securities Limited 2014 202,860 37,170 18.32 169,016 31 -10.24 -8.75 -7.46 Mercedes-Benz Financial Services 6 31-Dec 2014 521,923 35,841 6.87 504,549 n/d -10.03 -11.01 12.42 New Zealand Limited 2013 464,252 37,481 8.07 441,943 26 -1.85 -4.53 17.56 5 30-Sep 2015 566,501 82,621 14.58 512,151 52 13.01 11.16 4.73 Motor Trade Finance Limited 2014 540,910 80,676 14.91 484,421 51 -24.82 -22.67 22.94 14 31-Jul 2015 206,839 2,395 1.16 201,212 n/d 2,435.19 1,894.19 134.75 Nissan Financial Services NZ Pty Limited 2014 88,111 1,134 1.29 80,885 n/d n/a n/a n/a 7 31-Mar 2015 459,705 30,723 6.68 360,477 37 17.51 16.95 10.98 Nelson Building Society 2014 414,210 26,155 6.31 317,966 36 42.96 43.18 10.10 13 31-Mar 2015 236,893 147,342 62.20 35,126 64 -5.33 -5.27 3.19 ORIX New Zealand Limited 2014 229,576 131,810 57.41 32,316 63 0.81 0.66 2.10 21 30-Jun 2015 108,829 19,320 17.75 64,284 13 26.30 26.25 10.56 Police & Families Credit Union 2014 98,434 17,284 17.56 63,598 13 33.44 33.55 9.70 17 31-Mar 2015 153,421 56,542 36.85 94,060 370 -23.49 -26.61 12.50 Ricoh New Zealand Limited 2014 136,379 49,532 36.32 88,487 369 0.58 13.38 17.85 23 30-Sep 2014 79,306 12,358 15.58 62,152 3 -4.88 -4.90 -3.92 The Warehouse Financial Services Limited 2013 82,543 12,621 15.29 65,377 3 -5.37 -5.35 -9.14 3 31-Mar 2015 1,129,650 142,521 12.62 698,954 89 -55.47 -53.15 -0.81 Toyota Finance New Zealand Limited 2014 1,138,884 158,378 13.91 742,441 84 114.73 92.94 8.72 2 30-Sep 2015 2,440,613 365,462 14.97 2,347,163 145 10.68 10.53 3.66 UDC Finance Limited 2014 2,354,448 341,412 14.50 2,272,081 144 19.94 20.29 8.42 20 31-Mar 2015 124,537 16,128 12.95 103,870 9 -62.54 8.79 9.09 Wairarapa Building Society 2014 114,160 16,006 14.02 88,849 9 133.88 11.11 10.38 2015 11,777,377 1,974,105 16.76 9,620,318 2,344 -6.67 -4.63 4.32 Sector Total 2014 11,289,739 1,803,386 15.97 9,009,843 2,361 110.50 52.86 11.48
31-Dec 2014 107,738 45,534 42.26 83,013 n/d -71.06 -64.90 -19.75 GE Commercial Finance NZ 2013 134,247 45,003 33.52 42,270 n/d 111.89 37.81 -4.55 31-Dec 2014 17,873 63 0.35 10,153 n/d 70.15 103.31 1.86 GE Commercial Finance US (NZD) 2013 17,546 612 3.49 13,416 n/d -1,846.02 -4,429.54 8.79 31-Dec 2014 2,474,378 389,743 15.75 1,858,175 n/d -9.92 -10.95 -7.59 GE Finance and Insurance 2013 2,677,503 326,795 12.21 1,900,060 n/d 307.61 300.67 91.21 n/a = not available; n/d = not disclosed
114 | KPMG | FIPS 2015 Non-banks – Analysis of annual results
Credit Quality Measures Profitability Measures Efficiency Measures Provision for Impaired Asset Non-Interest Net Profit Operating Operating Impaired Asset Doubtful Debts/ Past Due Gross Impaired Expense/ Interest Interest Income/ Net Profit After After/ Average Underlying Expenses/ Expenses/ Entity Expense Gross Loans & Assets Assets Average Loans Margin Spread Average Total Tax Net Total Profit Average Total Operating $000 Advances $000 $000 and Advances % % Assets $000 Assets $000 Assets Income % % % % % % 2,525 2.68 1,193 13,481 1.95 10.94 9.39 7.08 7,772 33.52 10,764 7.88 44.24 Avanti Finance Limited 1,920 3.50 628 11,817 1.92 14.01 11.66 9.83 9,238 32.88 12,838 8.90 37.78 1,970 2.15 n/d n/d 0.55 7.29 6.82 0.50 9,450 47.44 13,139 3.62 46.83 BMW Financial Services New Zealand Limited 3,808 2.05 n/d n/d 1.17 7.52 7.14 0.32 8,032 46.75 11,105 3.29 42.39 412 0.68 0 3,896 0.20 5.16 4.63 1.29 1,725 4.82 1,725 5.57 87.10 Credit Union Baywide 498 0.75 0 3,985 0.28 5.29 4.78 1.36 1,721 5.08 1,721 5.67 86.00 559 0.98 0 1,858 0.63 8.08 7.56 4.77 643 3.17 643 11.59 91.97 Credit Union South 1,118 1.43 0 2,828 1.45 8.56 8.01 5.15 279 1.45 279 12.23 90.63 661 1.49 1,628 4,437 0.40 4.57 3.98 2.11 2,425 5.39 2,425 5.42 82.69 First Credit Union 835 1.61 1,430 5,065 0.60 4.15 3.51 2.18 1,535 3.91 1,535 5.24 84.17 514 0.39 4,325 0 0.25 n/a n/a 0.00 13,542 5.45 14,134 1.75 23.06 First Mortgage Trust 1,308 1.88 4,993 13,165 n/a n/a n/a n/a 10,251 n/a 10,496 n/a 24.17 13,340 2.63 11,413 21,645 2.10 11.01 10.59 3.83 24,068 28.42 33,522 7.32 53.24 Fisher & Paykel Finance Group 8,388 2.87 9,268 30,028 1.35 8.76 8.41 2.79 16,942 18.08 23,599 6.14 58.07 635 0.14 n/d n/d 0.16 4.17 3.97 0.16 3,951 10.13 6,631 2.51 58.46 Fuji Xerox Finance Limited 1,651 0.47 n/d n/d 0.51 5.53 5.37 1.51 14,796 49.96 16,495 1.47 21.06 48,678 2.86 n/d n/d 2.42 8.52 7.89 2.54 62,934 15.58 88,541 5.61 52.59 GE Capital 49,155 2.91 n/d n/d 2.43 9.07 8.62 2.61 69,891 24.20 98,413 5.75 51.59 2,365 4.03 0 5,739 2.69 21.25 18.53 19.79 7,164 28.55 10,298 26.02 65.55 Instant Finance Limited 1,539 3.77 0 6,087 1.85 20.83 17.84 18.85 6,426 27.02 9,278 26.03 67.76 0 0.00 n/d n/d 0.00 3.57 3.28 0.06 2,162 15.80 3,008 1.49 41.48 John Deere Financial Limited 0 0.00 n/d n/d 0.00 5.04 4.89 0.01 3,010 27.12 4,181 1.71 34.33 -129 0.19 n/d n/d -0.08 3.70 2.88 0.37 1,018 2.70 1,415 3.38 84.04 Medical Securities Limited 247 0.31 n/d n/d 0.14 3.51 2.62 0.42 1,675 3.82 2,326 2.69 68.78 Mercedes-Benz Financial Services 3,217 1.79 n/d n/d 0.67 4.23 3.83 0.00 8,112 22.13 11,128 1.29 30.67 New Zealand Limited 951 1.46 n/d n/d 0.23 4.56 4.18 0.00 9,016 27.39 12,505 1.39 30.70 105 0.99 77 55 0.02 9.06 8.07 2.15 6,942 8.50 9,999 9.20 83.45 Motor Trade Finance Limited -180 1.00 68 243 -0.04 9.41 8.46 2.56 6,143 7.79 8,995 9.91 84.64 1,294 0.61 n/d n/d 0.91 3.59 3.42 2.08 1,261 71.47 4,806 1.38 25.08 Nissan Financial Services NZ Pty Limited 0 0.00 n/d n/d n/a n/a n/a n/a -54 n/a 241 n/a 72.86 354 0.21 112 0 0.10 2.57 2.32 0.24 2,577 9.06 3,587 1.87 67.52 Nelson Building Society 455 0.27 0 1,424 0.15 2.50 2.27 0.25 2,193 9.11 3,067 1.83 67.22 -245 1.37 n/d 26 -0.71 12.35 9.25 16.48 15,795 11.32 21,950 18.75 66.83 ORIX New Zealand Limited -35 2.21 n/d 0 -0.10 12.59 9.74 18.42 16,684 13.55 23,170 20.04 66.31 -30 0.18 110 35 -0.05 4.78 4.21 0.24 2,036 11.12 2,035 3.06 61.29 Police & Families Credit Union -22 0.23 3 17 -0.04 4.58 4.07 0.29 1,612 9.78 1,612 3.16 65.16 640 0.00 n/d 919 0.70 8.30 7.44 91.18 5,020 9.47 7,538 91.77 94.21 Ricoh New Zealand Limited 368 0.00 n/d 939 0.46 8.76 8.06 94.62 6,561 16.47 10,271 92.67 91.65 2,116 3.88 n/d n/d 3.19 11.99 11.46 6.13 6,137 49.14 8,525 4.72 26.42 The Warehouse Financial Services Limited 2,447 3.78 n/d n/d 3.53 12.02 11.56 6.10 6,452 47.28 8,964 4.70 26.31 1,273 3.01 87 3,234 0.17 4.43 3.77 0.63 12,733 8.46 17,111 3.39 67.63 Toyota Finance New Zealand Limited 2,176 2.99 23 2,986 0.29 5.17 4.55 1.17 28,591 18.97 36,525 2.72 43.49 10,427 1.33 6,369 18,919 0.45 4.87 4.14 0.24 57,050 16.14 79,323 1.35 26.45 UDC Finance Limited 11,733 1.38 5,172 19,436 0.53 4.90 4.23 0.20 51,543 15.71 71,768 1.38 27.27 56 0.14 462 2,471 0.06 2.22 1.99 0.30 106 0.66 359 1.94 84.81 Wairarapa Building Society 72 0.10 598 526 0.08 2.22 1.95 0.56 283 1.78 330 2.18 85.49 90,736 1.74 25,776 76,715 0.96 6.62 5.86 3.02 254,623 13.48 352,606 5.59 59.23 Sector Total 88,432 1.87 22,183 98,546 1.01 6.94 6.32 3.15 272,820 17.45 369,714 5.56 56.53
318 0.49 n/d n/d 0.51 2.37 1.53 0.67 531 1.17 875 1.97 66.63 GE Commercial Finance NZ -87 0.21 n/d n/d -0.12 2.87 1.81 2.00 1,835 4.16 2,493 2.88 62.21 -84 0.61 n/d n/d -0.70 1.89 1.87 0.04 -545 -161.40 81 1.92 101.08 GE Commercial Finance US (NZD) -349 2.53 n/d n/d -2.42 2.65 2.63 1.20 -1,824 -599.69 -2,435 20.32 536.52 48,444 2.97 n/d n/d 2.50 8.86 8.26 2.64 62,948 17.57 87,585 5.80 52.36 GE Finance and Insurance 49,591 2.97 n/d n/d 3.05 12.07 11.48 3.36 69,880 32.45 98,355 7.35 50.33 n/a = not available; n/d = not disclosed
FIPS 2015 | KPMG | 115
Credit Quality Measures Profitability Measures Efficiency Measures Provision for Impaired Asset Non-Interest Net Profit Operating Operating Impaired Asset Doubtful Debts/ Past Due Gross Impaired Expense/ Interest Interest Income/ Net Profit After After/ Average Underlying Expenses/ Expenses/ Entity Expense Gross Loans & Assets Assets Average Loans Margin Spread Average Total Tax Net Total Profit Average Total Operating $000 Advances $000 $000 and Advances % % Assets $000 Assets $000 Assets Income % % % % % % 2,525 2.68 1,193 13,481 1.95 10.94 9.39 7.08 7,772 33.52 10,764 7.88 44.24 Avanti Finance Limited 1,920 3.50 628 11,817 1.92 14.01 11.66 9.83 9,238 32.88 12,838 8.90 37.78 1,970 2.15 n/d n/d 0.55 7.29 6.82 0.50 9,450 47.44 13,139 3.62 46.83 BMW Financial Services New Zealand Limited 3,808 2.05 n/d n/d 1.17 7.52 7.14 0.32 8,032 46.75 11,105 3.29 42.39 412 0.68 0 3,896 0.20 5.16 4.63 1.29 1,725 4.82 1,725 5.57 87.10 Credit Union Baywide 498 0.75 0 3,985 0.28 5.29 4.78 1.36 1,721 5.08 1,721 5.67 86.00 559 0.98 0 1,858 0.63 8.08 7.56 4.77 643 3.17 643 11.59 91.97 Credit Union South 1,118 1.43 0 2,828 1.45 8.56 8.01 5.15 279 1.45 279 12.23 90.63 661 1.49 1,628 4,437 0.40 4.57 3.98 2.11 2,425 5.39 2,425 5.42 82.69 First Credit Union 835 1.61 1,430 5,065 0.60 4.15 3.51 2.18 1,535 3.91 1,535 5.24 84.17 514 0.39 4,325 0 0.25 n/a n/a 0.00 13,542 5.45 14,134 1.75 23.06 First Mortgage Trust 1,308 1.88 4,993 13,165 n/a n/a n/a n/a 10,251 n/a 10,496 n/a 24.17 13,340 2.63 11,413 21,645 2.10 11.01 10.59 3.83 24,068 28.42 33,522 7.32 53.24 Fisher & Paykel Finance Group 8,388 2.87 9,268 30,028 1.35 8.76 8.41 2.79 16,942 18.08 23,599 6.14 58.07 635 0.14 n/d n/d 0.16 4.17 3.97 0.16 3,951 10.13 6,631 2.51 58.46 Fuji Xerox Finance Limited 1,651 0.47 n/d n/d 0.51 5.53 5.37 1.51 14,796 49.96 16,495 1.47 21.06 48,678 2.86 n/d n/d 2.42 8.52 7.89 2.54 62,934 15.58 88,541 5.61 52.59 GE Capital 49,155 2.91 n/d n/d 2.43 9.07 8.62 2.61 69,891 24.20 98,413 5.75 51.59 2,365 4.03 0 5,739 2.69 21.25 18.53 19.79 7,164 28.55 10,298 26.02 65.55 Instant Finance Limited 1,539 3.77 0 6,087 1.85 20.83 17.84 18.85 6,426 27.02 9,278 26.03 67.76 0 0.00 n/d n/d 0.00 3.57 3.28 0.06 2,162 15.80 3,008 1.49 41.48 John Deere Financial Limited 0 0.00 n/d n/d 0.00 5.04 4.89 0.01 3,010 27.12 4,181 1.71 34.33 -129 0.19 n/d n/d -0.08 3.70 2.88 0.37 1,018 2.70 1,415 3.38 84.04 Medical Securities Limited 247 0.31 n/d n/d 0.14 3.51 2.62 0.42 1,675 3.82 2,326 2.69 68.78 Mercedes-Benz Financial Services 3,217 1.79 n/d n/d 0.67 4.23 3.83 0.00 8,112 22.13 11,128 1.29 30.67 New Zealand Limited 951 1.46 n/d n/d 0.23 4.56 4.18 0.00 9,016 27.39 12,505 1.39 30.70 105 0.99 77 55 0.02 9.06 8.07 2.15 6,942 8.50 9,999 9.20 83.45 Motor Trade Finance Limited -180 1.00 68 243 -0.04 9.41 8.46 2.56 6,143 7.79 8,995 9.91 84.64 1,294 0.61 n/d n/d 0.91 3.59 3.42 2.08 1,261 71.47 4,806 1.38 25.08 Nissan Financial Services NZ Pty Limited 0 0.00 n/d n/d n/a n/a n/a n/a -54 n/a 241 n/a 72.86 354 0.21 112 0 0.10 2.57 2.32 0.24 2,577 9.06 3,587 1.87 67.52 Nelson Building Society 455 0.27 0 1,424 0.15 2.50 2.27 0.25 2,193 9.11 3,067 1.83 67.22 -245 1.37 n/d 26 -0.71 12.35 9.25 16.48 15,795 11.32 21,950 18.75 66.83 ORIX New Zealand Limited -35 2.21 n/d 0 -0.10 12.59 9.74 18.42 16,684 13.55 23,170 20.04 66.31 -30 0.18 110 35 -0.05 4.78 4.21 0.24 2,036 11.12 2,035 3.06 61.29 Police & Families Credit Union -22 0.23 3 17 -0.04 4.58 4.07 0.29 1,612 9.78 1,612 3.16 65.16 640 0.00 n/d 919 0.70 8.30 7.44 91.18 5,020 9.47 7,538 91.77 94.21 Ricoh New Zealand Limited 368 0.00 n/d 939 0.46 8.76 8.06 94.62 6,561 16.47 10,271 92.67 91.65 2,116 3.88 n/d n/d 3.19 11.99 11.46 6.13 6,137 49.14 8,525 4.72 26.42 The Warehouse Financial Services Limited 2,447 3.78 n/d n/d 3.53 12.02 11.56 6.10 6,452 47.28 8,964 4.70 26.31 1,273 3.01 87 3,234 0.17 4.43 3.77 0.63 12,733 8.46 17,111 3.39 67.63 Toyota Finance New Zealand Limited 2,176 2.99 23 2,986 0.29 5.17 4.55 1.17 28,591 18.97 36,525 2.72 43.49 10,427 1.33 6,369 18,919 0.45 4.87 4.14 0.24 57,050 16.14 79,323 1.35 26.45 UDC Finance Limited 11,733 1.38 5,172 19,436 0.53 4.90 4.23 0.20 51,543 15.71 71,768 1.38 27.27 56 0.14 462 2,471 0.06 2.22 1.99 0.30 106 0.66 359 1.94 84.81 Wairarapa Building Society 72 0.10 598 526 0.08 2.22 1.95 0.56 283 1.78 330 2.18 85.49 90,736 1.74 25,776 76,715 0.96 6.62 5.86 3.02 254,623 13.48 352,606 5.59 59.23 Sector Total 88,432 1.87 22,183 98,546 1.01 6.94 6.32 3.15 272,820 17.45 369,714 5.56 56.53
318 0.49 n/d n/d 0.51 2.37 1.53 0.67 531 1.17 875 1.97 66.63 GE Commercial Finance NZ -87 0.21 n/d n/d -0.12 2.87 1.81 2.00 1,835 4.16 2,493 2.88 62.21 -84 0.61 n/d n/d -0.70 1.89 1.87 0.04 -545 -161.40 81 1.92 101.08 GE Commercial Finance US (NZD) -349 2.53 n/d n/d -2.42 2.65 2.63 1.20 -1,824 -599.69 -2,435 20.32 536.52 48,444 2.97 n/d n/d 2.50 8.86 8.26 2.64 62,948 17.57 87,585 5.80 52.36 GE Finance and Insurance 49,591 2.97 n/d n/d 3.05 12.07 11.48 3.36 69,880 32.45 98,355 7.35 50.33 n/a = not available; n/d = not disclosed 116 | KPMG | FIPS 2015
Philip Whitmore Partner – IT Advisory KPMG
A partner within KPMG’s IT Advisory team, Philip leads KPMG’s technology risk, security advisory services and data analytics practices. Philip helps organisations gain insights from their data, maximising TACKLING CYBER the benefits presented by ‘big data’, and managing their IT-related risks, including around cybersecurity. His detailed IT advisory and assurance knowledge and experience is THREATS – complemented by his internal audit, fraud and business process controls background. Philip sits on the boards and steering committees for a range THREE KEY of professional bodies, including the Institute of Internal Auditors, the Information Systems Security Certification Consortium (ISC)2, the Information Systems Audit and Control Association (ISACA), and the PRIORITIES Cloud Security Alliance. Philip works with organisations to help them understand the impact of new technology on their business and how to mitigate risks posed. FOR FINANCIAL INSTITUTIONS FIPS 2015 | KPMG | 117
Media reports on cyber incidents are everywhere these days. It seems as if all organisations – both public and private – are extremely fragile compared to the invincible strength of their attackers – varying from script kiddies to organised crime. Recent incidents once again signalled that reputations are at stake when private data comes out into the public arena. It goes without saying that organisations must protect their digital assets properly and that failing to do so may result in serious problems. TACKLING CYBER Cybersecurity clearly deserves a prominent place on the management agenda of all THREATS – financial institutions.
It has often been stated that in a world where everything is interconnected, data is the new oil. The pace of THREE KEY technological progress is astounding and the world has become a village when it comes to communication and interaction. The classic boundaries of financial institutions – and their PRIORITIES information systems – are blurred, while in all markets they can pursue success only through working in agile coalitions with partners. In the light of these developments, one fact is very clear: control of your data and systems FOR FINANCIAL is essential to achieve strategic goals. INSTITUTIONS 118 | KPMG | FIPS 2015
It is easier than ever before to buy blurs their perception of the subject. a standby incident response process do-it-yourself malicious software; Many Executives struggle to grasp (response). The success of such an the strong mutual dependencies in a what is really going on and debunking approach, however, is dependent on network- based society bring along the lingo of the security industry is solid insights. new vulnerabilities. Cyber crime essential in making them understand shifts from amateurs to resourceful what is and what can be at stake. 2. Shifting security from a organised crime groups, which All in all, it seems fair to say that technological approach to perform focused attacks for espionage many financial institutions lack the a balanced approach or massive disruptions of systems. necessary insights to be able to take Most Executives currently consider And hacktivists have discovered cyber informed decisions when it comes cybersecurity a technical issue. This crime is an effective means to make to cybersecurity. This is a serious clearly implies a lack of attention to their views heard by bringing sensitive issue and IT leadership should the other two pillars of a complete information into the public domain. simply not accept this. They need and balanced strategy: people Whilst cybersecurity is on top of to be able to make well-informed and processes. many financial institutions agendas, investment decisions that address organisations struggle to properly cybersecurity risks. By doing so, they assess, measure and communicate can engage business sponsors and Put the user experience – not the to what extent their business is build understanding, confidence and technology – at the centre of the resilient against cyberattacks. This credibility. In practice, this is largely cybersecurity approach. understanding is paramount in order done in a rather reactive way. to tackle cyber risk effectively. To This is in stark contrast to other effectively tackle the growing cyber This view is closely interlinked with the management areas – such as threat, there are three key priorities for fact that cybersecurity is a relatively commercial information – where financial institutions: young issue. In a short period of relevant insights are often just a time, the industry has evolved and few clicks away to justify strategic 1. Gaining insights introduced a series of concepts, tools decisions such as entry into new and techniques. It may be tempting for Our experience shows that many market segments. There’s no reason Executives to embrace these solutions New Zealand financial institutions why insights into cybersecurity should in order to feel comfortable about struggle to grasp what cyber risk not be available at a comparable the security of their organisation really means for their organisation. level. Moreover, such insights are and its digital assets. Everyone This constitutes a gap between an highly significant: a lack of effective can buy security tools, while it is intuitive and operational knowledge of cybersecurity may have serious much more challenging to build up a the assets. consequences and may even hamper holistic approach. financial institutions in reaching their strategic goals. The reality is that technology is just You can’t manage what you don’t one part of the equation in the domain know. A professionalisation of insights is of cybersecurity and an isolated the foundation for applying a risk technological approach will lead to a management approach to dealing false sense of security. In other words, Moreover, the information processes with cybersecurity. In essence, a fool with a tool is still a fool. about threats, risks and solutions tend cybersecurity means performing a to be dominated by technological buzz risk assessment from the perspective words. This further contributes to of the organisation (prevention), the sense of mystery that surrounds identifying and analysing critical cybersecurity for management and it assets (detection), and implementing FIPS 2015 | KPMG | 119
Organisations should adopt a more 3. From reactive to The maturity level of financial balanced approach. A cybersecurity predictive – Cybersecurity institutions can roughly be divided strategy should be a cost-effective capabilities must be into four stages of cyber strategies, control of the cyber environment, developed ranging from reactive, structured, and addressing the coherent domains of integrated to predictive. people, processes and technology. The main driver for improving To achieve the highest level of maturity The best way to do so is to put the cybersecurity is too often – which is key, because the stakes user experience – not the technology unfortunately, the occurrence of an are high – financial institutions must – at the centre of the cybersecurity incident. It is a clear sign that for find new ways. They should of course approach. Cybersecurity is not many financial institutions, the cyber focus on being well informed of about tools and technologies; it is strategies are largely reactive. This possible threats and invest in a proper about people using those tools and immaturity may also mean that the defence. However, they should not technologies in a user-friendly, natural organisations focus on the wrong do this in an isolated way, but rather way. Professionals working in the areas: they probably miss upcoming use the knowledge and experience security domain have a responsibility issues and will almost inevitably of peers. A joint effort is essential here: they should not focus solely on be overwhelmed by a continuously to the maintenance of a high level the technology. They also need the changing technological landscape. of intelligence. skills to communicate about the issue Closely related to this is that in a broader sense in terms of people, compliance seems to be a dominant Another important aspect is better processes and technology. factor when it comes to investing knowledge management. Insights can be enriched by smart combinations Related to this is the fact that in cybersecurity. For many financial of data from different sources and cybersecurity cannot just be the focus institutions, organisations are driven by combining data with issues from of a specialist team. Cyber criminals more by compliance than security. the past. A multidisciplinary approach may use advanced technologies to helps to avoid specialist blindness penetrate an organisation, but may Incidents are unfortunately still and brings in the necessary new also try social engineering or benefit the main driver for investment in perspectives to improve predictions of from careless employees. The level cybersecurity. risk areas. of security depends on the weakest link in the organisation. Therefore, cybersecurity concerns all employees At the same time, most of them in an organisation. Cybersecurity leverage compliance to achieve is an attitude, not a department. To security targets. In practice, the create awareness, the right tone at differences between various the top is an effective driver to get organisations are huge in this respect. more focus on this issue. Executives Some organisations are driven that “walk the talk” – for instance, solely by a response to incidents. by demanding that their mobiles and Their reactive investments in the tablets are secure – have a stronger cybersecurity domain are driven by impact on the rest of the organisation. fear. On the other side of the spectrum Executives that do not lead by are organisations that have a lot more example might run the risk that the self-confidence. By continuously rest of the organisation lowers its scanning threats and analysing security standards. data patterns, they have developed capabilities to predict the character and nature of future events.
120 | KPMG | FIPS 2015 Registered banks – ownership & credit ratings14 Long-term Credit Rating Registered Banks Ultimate Shareholding % Standard & Poor's Moody's Fitch Ratings Australia and New Zealand ANZ Bank New Zealand Limited 100 AA- Stable Aa3 Stable AA- Stable Banking Group Limited Commonwealth Bank of ASB Bank Limited 100 AA- Stable Aa3 Stable AA- Stable Australia Australia and New Zealand Australia and New Zealand Banking Group Limited – 100 AA- Stable Aa2 Stable AA- Stable Banking Group Limited New Zealand Branch15 Bank of Baroda (New Zealand) Bank of Baroda (India) 100 BBB- Stable Limited Bank of China (New Zealand) Bank of China Limited (China) 100 A1 Stable Limited Bank of India (New Zealand) Bank of India (India) 100 BBB- Stable Limited Bank of New Zealand National Australia Bank Limited 100 AA- Stable Aa3 Stable AA- Stable China Construction Bank China Construction Bank 100 A Stable A1 Stable (New Zealand) Limited Corporation Citibank, N.A. New Zealand Branch Watch Citigroup Inc. 100 A A1 Stable A+ Stable and Associated Banking Group16 Pos Commonwealth Bank of Australia – Commonwealth Bank of 100 AA- Stable Aa2 Stable AA- Stable New Zealand Branch17 Australia Deutsche Bank AG, New Zealand Deutsche Bank AG 100 BBB+ Stable A2 Negative A- Stable Branch18 Heartland Bank Limited Heartland New Zealand Limited 100 BBB Stable Industrial and Commercial Bank of Industrial and Commercial Bank 100 A1 Stable China (New Zealand) Limited of China Limited (ICBC) JPMorgan Chase Bank, N.A. JPMorgan Chase & Co. 100 A+ Stable Aa2 Stable AA- Stable New Zealand Branch19 New Zealand Post Limited/ Kiwibank Limited 100 A+ Stable Aa3 Stable AA Stable New Zealand Government Kookmin Bank Auckland Branch20 KB Financial Group Inc. 100 A Stable A1 Stable A Stable Rabobank Nederland New Zealand Coöperatieve Centrale 100 A+ Stable Aa2 Stable AA- Stable Banking Group21, 22 Raiffeisen-Boerenleenbank B.A. Coöperatieve Centrale Rabobank New Zealand Limited 100 A Stable Raiffeisen-Boerenleenbank B.A. Southland Building Society Mutual 100 BBB Positive The Bank of Tokyo-Mitsubishi UFJ The Bank of Tokyo-Mitsubishi 100 A+ Negative A1 Stable A Stable Limited, Auckland Branch23 UFJ, Ltd The Co-operative Bank Limited Mutual 100 BBB- Positive The Hongkong and Shanghai Banking Corporation Limited, HSBC Holdings plc 100 AA- Stable Aa2 Stable AA- Stable New Zealand Branch24 TSB Bank Limited TSB Community Trust 100 A- Stable Westpac Banking Corporation – Westpac Banking Corporation 100 AA- Stable Aa2 Stable AA- Stable New Zealand Division Westpac New Zealand Limited Westpac Banking Corporation 100 AA- Stable Aa3 Stable AA- Stable
FIPS 2015 | KPMG | 121
Non-banks credit ratings14
Rating and Standard & Poor's Fitch Ratings Moody's Investment Rating Outlook Rating Outlook Rating Outlook Rating Outlook Avanti Finance Limited BB Stable BMW Financial Services New Zealand A+ Stable A2 Positive Limited25 Credit Union Baywide BB- Positive Credit Union South BB- Stable First Credit Union BB- Stable First Mortgage Trust Watch Fisher & Paykel Finance Limited BB Dev Fuji Xerox Finance Limited26 AA Stable GE Capital27 AA+ Negative A1 Stable Instant Finance Limited John Deere Financial Limited28 A2 Stable Medical Securities Limited BBB+ Stable Mercedes-Benz Financial Services A- Stable A- Stable A3 Positive New Zealand Limited29 Motor Trade Finance Limited Nelson Building Society BB+ Stable Nissan Financial Services NZ Pty Limited30 A- Stable BBB+ Stable A3 Stable A+ Stable ORIX New Zealand Limited31 A- Negative A- Stable Baa1 Stable A+ Stable Police & Families Credit Union BB+ Stable Ricoh New Zealand Limited32 A Stable AA- Stable The Warehouse Financial Services Limited Toyota Finance New Zealand Limited AA- Stable Aa3 Stable UDC Finance Limited AA- Stable Wairarapa Building Society BB+ Stable
122 | KPMG | FIPS 2015
Non-banks ownership14
Non-bank Entity Ultimate Shareholding % Non-bank Entity Ultimate Shareholding % Various investment/nominee Mercedes-Benz Financial Avanti Finance Limited 100 Daimler AG 100 companies Services New Zealand Limited BMW Financial Services Various Licensed Motor Vehicle BMW AG 100 Motor Trade Finance Limited 100 New Zealand Limited Dealers Credit Union Baywide Various depositors 100 Nelson Building Society Various depositors 100 Credit Union South Various depositors 100 Nissan Financial Services NZ Nissan Motor Co. Limited 100 First Credit Union Various depositors 100 Pty Limited First Mortgage Trust Various unitholders 100 ORIX New Zealand Limited ORIX Corporation 100 Fisher & Paykel Finance Group Police & Families Credit Union Various depositors 100 Haier Group Corporation 100 Limited Ricoh New Zealand Limited Ricoh Co. Ltd (Japan) 100 Fuji Xerox Finance Limited Fuji Xerox Co. Ltd (Japan) 100 The Warehouse Financial The Warehouse Group Limited 100 GE Finance and Insurance IGE USA Investments (UK) 100 Services Limited Toyota Finance New Zealand Toyota Motor Corporation GE Commercial Finance NZ Topaz Holdings LLC (USA) 100 100 Limited (Japan) GE Commercial Finance (USD) Various private shareholders 100 Australia and New Zealand NZ (USA) UDC Finance Limited 100 Banking Group Instant Finance Limited Various Private Shareholders 100 Wairarapa Building Society Various depositors 100 John Deere Financial Limited Deere & Company (USA) 100 Medical Assurance Society Medical Securities Limited 100 New Zealand Limited Descriptions of the credit rating grades
Long-term credit rating Description of the steps in the Standard & Poor’s credit rating grades for the rating of the long-term senior grades assigned by unsecured obligations payable in New Zealand, in New Zealand dollars. Standard & Poor’s AAA Extremely strong capacity to meet financial commitments. Highest rating. AA Very strong capacity to meet financial commitments. A Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. BBB Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. BB Less vulnerable in the near term, but faces major ongoing uncertainties to adverse business, financial and economic conditions. B More vulnerable to adverse business, financial and economic conditions, but currently has the capacity to meet financial commitments. CCC Currently vulnerable and dependent on favourable business, financial and economic conditions to meet financial commitments. CC Currently highly vulnerable. Default has not yet occurred but is expected to be a virtual certainty. Plus (+) or Minus (-) The ratings AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing with the major rating categories. BB, B, CCC, and CC Borrowers rated BB, B, CCC and CC are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and CC the highest. While such borrowers will likely have some quality and protective characteristics, these maybe outweighed by large uncertainties or major exposures to adverse conditions. Assigned by Moody’s Moody’s Investors Service appends numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through Caa. The Investors Service modifier 1 indicates the obligation ranks in the higher end of its generic category; the modifier 2 indicates a mid range ranking; and the modifier 3 indicates the lower end of that generic category. Assigned by Fitch Ratings Fitch Ratings applies ‘investment grade’ rates 'AAA' to 'BBB' to indicate relatively low to moderate credit risk, while those in the ‘speculative’ or ‘non-investment grade’ categories which have either signalled a higher level of credit risk or that a default has already occurred, Fitch Ratings applies a ‘BB’ to ‘D’ rating. The modifiers ‘+’ or ‘-’ may be appended to a rating to denote relative status within the major rating categories. Credit ratings express risk in relative rank order, which to say they are ordinal measures of credit risk and not predictive of a specific frequency of default or loss.
FIPS 2015 | KPMG | 123 Definitions
Terms and ratios used Definitions used in this survey in this survey
Gearing Net assets divided by total assets.
Gross impaired assets Includes all impaired assets, restructured assets, assets acquired through the enforcement of security, but excludes past due assets.
The charge to the Profit and Loss Account for bad debts and provisions for doubtful debts, which is net of recoveries (where Impaired asset expense identifiable).
Customer deposits (including accrued interest payable where identifiable), balances with banks, debt securities, subordinated debt Interest bearing liabilities and balances with related parties.
Cash on hand, money on call and balances with banks, trading and investment securities, net loans and advances (including accrued Interest earning assets interest receivable where identifiable), leased assets net of depreciation and balances with related parties.
Interest expense Includes all forms of interest or returns paid on debt instruments.
Interest margin Net interest income divided by average interest earning assets.
Difference between the average interest rate on average interest earning assets, and the average interest rate on average interest Interest spread bearing liabilities.
Includes loans and advances, lease receivables (net of unearned income) and accrued interest receivable (where identifiable), but Loans and advances excludes amounts due from banks, marketable securities, loans to related parties, sundry debtors and prepayments.
Net assets Total assets less total liabilities.
Net interest income Interest income (including net income from acting as a lessor) less interest expense.
Net loans and advances Loans and advances, net of provision for doubtful debts.
Net profit after tax After minority interests, adjusting for the impact of subvention payments.
Includes all expenses charged to arrive at net profit before tax (excluding interest expense, impaired asset expense, subvention Operating expense payments and depreciation of leased assets where a lessor).
Operating income Net interest income and income from all other sources net of depreciation of leased assets, but excludes subvention receipts.
Includes any asset which has not been operated by the counterparty within its key terms for 90 days and which is not an impaired or Past due assets restructured asset.
Provision for doubtful debts Includes both collective and individual provisions for bad and doubtful debts.
Total assets Excludes goodwill assets (unless specifically defined).
Total liabilities Includes subordinated debt, but excludes minority interest.
Ultimate shareholding Identifies the ultimate holding company rather than any intermediate holding companies.
Operating income less operating expense and impaired asset expense. Items of a non-recurring nature, unrelated to the ongoing Underlying profit operations of the entity, are excluded. 124 | KPMG | FIPS 2015 Endnotes
1. Our analysis of registered banks is from the view of the top geographic 13. On 15 March 2015, Varde Partners, KKR, and Deutsche Bank signed entity in New Zealand for each banking group and comprises an agreement for the purchase of GE Money – the consumer finance 21 entities. The following entities hold a separate registered bank division of GE Capital (NZ). The Group/Company will continue to licence and are included within top level banking groups for the operate the existing commercial business in their 2015 financial purposes of our analysis: ANZ Bank New Zealand Limited, ASB Bank year, or until an exit strategy is decided upon and executed. On Limited, Rabobank New Zealand Limited, Westpac New Zealand 10 November 2015, GE Capital agreed to sell off its remaining Limited. New Zealand commercial lending and leasing portfolios to 2. RBNZ ‘An updated assessment of dairy sector vulnerabilities’, Bulletin Sankaty Advisors. Vol. 78, No 8, December 2015. 14. As at 5 February 2016. 3. For example, when ‘ANZ’ is mentioned, this is referring to Australia 15. Rating of ANZ Banking Group Limited. New Zealand Banking Group Limited – New Zealand Banking Group 16. Rating of Citibank, N.A. and not ANZ Bank New Zealand Limited. 1 7. Rating of Commonwealth Bank of Australia. 4. The results for Australia and New Zealand Banking Group, 18. Rating of Deutsche Bank of AG. Commonwealth Bank of Australia and Westpac Banking Corporation relate to the total New Zealand operations of these entities. 19. Rating of JPMorgan Chase Bank, N.A. 5. The capital adequacy ratio’s reported are for the overseas banking 20. Rating of Kookmin Bank (South Korea). group. 21. Rating of Cooperative Rabobank U.A. for Standard & Poor’s and Fitch. 6. Total Assets = Total Assets - Intangible Assets. 22. Rating of Rabobank Nederland, New Zealand Branch for Moody’s. 7. Operating income for Heartland includes net interest income, net 23. Rating of The Bank of Tokyo-Mitsubishi UFJ Limited. operating lease income, other income and fee income. 24. Rating of The Hongkong and Shanghai Banking Corporation Limited. 8. For a copy of the FMA’s Strategic Risk Outlook, visit http://fma.co.nz/ 25. Rating of parent company BMW AG. fmas-role/corporate-publications/strategic-risk-outlook/. 26. Rating of parent company Fuji Xerox Co. Ltd. 9. Autoregressive Integrated Moving Average. 2 7. Rating of parent company GE Capital Corporation. 10. Vector Autoregression. 28. Rating of parent company John Deere Financial Limited Australia. 11. We have assumed that margins for operating expenses and other 29. Rating of parent company Daimler AG. income will remain flat when calculating banking profits using the ARIMA output. 30. Rating of parent company Nissan Motor Co. Limited. 12. Fisher & Paykel Finance were sold on 27 October to Australian 31. Rating of parent company ORIX Corporation. Financial Services firm FlexiGroup for $315 million, subject to RBNZ 32. Rating of parent company Ricoh Co. Limited. and Overseas Investment Office approval. FIPS 2015 | KPMG | 125 KPMG’s Financial Services Team
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