Financial Institutions Performance Survey FIPS Banks – Review of 2020 9.04% 27.57% rise in decrease in NPAT operating expenses 48.32% 0.46% escalation in dip in net total provisions interest income 14 bps 2.95% decrease in net rise in interest margins gross lending 275% 61 bps increase in drop in average impaired asset expense funding costs Current and up to date as at 5 p.m. Friday 19 February 2021 Contents 2 The Survey 4 A KPMG view from the editor 6 Industry overview 16 RBNZ Covid-19 timeline 18 Timeline of events 22 Provisioning: Volatility in a Covid-19 world 24 Sector performance 35 Focus on capital 36 Analysis of annual results 44 Major banks: Quarterly analysis 48 What will 2021 bring amid the fierce battle against cyber crime? 50 Pandemic response: Building and maintaining the trust 52 Focus on climate change 56 FMA: Agility, the key to managing Covid-19 and changing regulations 58 NZIER: Improving business confidence supports investment demand 60 NZBA: Delivering in a crisis 62 CoreLogic: Mortgage activity in 2020 – from slump to recovery 66 Massey University: Banking industry review and forecasts 72 Ownership and credit ratings 73 Descriptions of the credit rating grades 74 Definitions 75 Endnotes 77 KPMG’s Financial Services Team 78 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 2020 The Survey The KPMG Financial TABLE 1: ENTITY MOVEMENTS1 Institutions Performance Who’s out Who’s in Survey (FIPS) report of 2020 Banks: 26 — Nil — Nil* represents the 34th year * There have been no changes to the bank participants this year. that KPMG has provided in-depth insights into There have been no changes to Massey University continues to New Zealand’s banking sector. the bank participants this year. be a partner and key contributor to th However, in May 2020, the Reserve the compilation of this publication, In this 34 edition we present Bank of New Zealand (RBNZ) assisting with the data collection, industry commentary and registered Industrial and Commercial as well as drafting the banks’ analysis on the performance Bank of China (ICBC) to operate profit forecasting section of this in New Zealand as a branch, in survey. We thank them for their of the New Zealand registered addition to the subsidiary which continued contribution. has been operating in New Zealand banks, together with a range External contributors continue to since November 2013. ICBC has a of topical articles from other play a vital role in our publication, 31 December balance date, therefore providing insight on key issues key stakeholders such as their first year of dual results will be and developments that we might included in next year’s survey. industry experts, regulators not otherwise have. We would like and our own business leaders. As with all previous FIPS, the to acknowledge the contributors information used in compiling from CoreLogic, Financial Markets our analysis is extracted from Authority (FMA), Massey University, publicly available annual reports New Zealand Bankers’ Association and disclosure statements for each (NZBA) and New Zealand Institute of The survey covers registered bank organisation, with the exception of Economic Research (NZIER) for their entities with balance dates between certain information which is provided exceptional contribution towards the 1 October 2019 and 30 September directly from the survey participants. compilation of this publication. 2020. As a result, registered banks with the balance date of 31 December We wish to thank the survey We have supplemented their external have had their 31 December 2019 participants for their valued thought leadership commentary with financial results included in this year’s contribution, both for the additional some of KPMG’s own business line survey as their most recent results. information provided and for the time thought leadership. We trust you find This includes Bank of China, China made available to meet and discuss the content of this survey of interest. Construction Bank, Citibank, Industrial the industry issues with us. and Commercial Bank of China, JPMorgan Chase Bank, Kookmin Bank, Rabobank and The Hongkong and Shanghai Banking Corporation. In late 2020 we published and launched our FIPS Non-bank – Review of 2020 publication. This publication can be accessed at the following link: https://home.kpmg/nz/en/home/insights/2020/12/fips-non-bank-2020.html © 2021 KPMG, a New Zealand Partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. FIPS 2020 | KPMG | 3 © 2021 KPMG, a New Zealand Partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 4 | KPMG | FIPS 2020 A KPMG view from the editor The key themes of previous What an extraordinary year 2020 has been, the financial and health FIPS Banks Reviews have implications of a global pandemic focused around metrics on New Zealanders has been like the three C’s, Capital, unprecedented. Upon the emergence of Covid-19, no one knew exactly Conduct and Culture along what the impact would be, with many with loan book growth, forecasting exercises subsequently margin movement, proven wrong. This can largely be attributed to the Government’s support impairments and regulation. and our efforts as a country, with These historic themes have New Zealanders being adaptable and been overshadowed in resilient as we were asked to ‘go hard, go early’ in our response to the the FIPS Banks – Review growing pandemic. of 2020 publication by a Strong government support, widely John Kensington new C, Covid-19. The global accessible to many businesses and Partner – Audit pandemic has firstly brought individuals, allowed the New Zealand economy to withstand and then Head of Banking and Finance into focus our business KPMG quickly recover from the initial shock of resilience and, after the initial the pandemic with the country falling shock around liquidity, has into a holding pattern of an almost John has been with KPMG’s Financial ‘normal’ way of life. This has been Services audit team for over 36 years, then given us occasion to fuelled by ‘bounceback spending’ with 23 of these as a partner working with pause and reflect on business some expenditure that would have a wide range of financial services practices and how we otherwise occurred overseas. Our new audit clients, specialising in banks and normal, has changed the way we work finance companies. might conduct our business and do business. Increasingly we are going forward. seeing trends that were a necessity John has a wealth of experience in during level four lockdown becoming auditing and accounting for banking commonplace in the workplace, with products and services including The historic dominant lens of many businesses adopting work-from- treasury, retail offerings, corporate profit is being replaced with home friendly business models. The loans and loan provisioning. He is challenges for many, will be allowing currently KPMG’s Head of Banking a more balanced approach, for this new way of working without and Finance and editor of this involving people, customers detrimentally impacting culture and publication. John is also Deputy and staff and the wider ensuring an innovative approach is Chairman of the New Zealand taken to ensuring workforces receive Auditing and Assurance Standards community together with an sufficient technological support Board (NZAuASB) and serves as a increasing focus on diversity, while maintaining good security board member of the XRB. John is measures and maintaining and also a fellow of CA ANZ, a member climate and cyber issues. developing culture. of the Institute of Directors and a Trustee of Breast Cancer Cure. © 2021 KPMG, a New Zealand Partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. FIPS 2020 | KPMG | 5 The banking sector played a pivotal While New Zealand has weathered Climate-related reporting will be role in their responsiveness to the the storm well so far, the same cannot another area of change for banks, different remedial monetary policies be said for many other countries, as the Government announced rolled out by the Treasury, Ministry of some of whom are facing secondary mandatory climate-related financial Business, Innovation and Employment lockdowns; or stricter requirements to reporting for banks and other financial (MBIE) and the Reserve Bank of curb the spread of the pandemic. This institutions in September. The major New Zealand (RBNZ). Declining poses real concern for the banking Australian owned banks have an interest rates have been driving the sector going forward, both through advantage in their opportunity to prosperity of many domestic markets the economic effects of lockdowns leverage the work performed over through increased spending – the imposed by our trading partners, but climate-related financial reporting housing market being one of the also what another big lockdown in already undertaken by their most notable. Whether this increased New Zealand would look like were Australian counterparts. domestic spending is sustainable, it to occur should the vaccination Other emerging threats include cyber or whether it will be enough to save programme and border restrictions crime, the need to exhibit diversity and many businesses in the aviation and fail to keep the virus from re-emerging inclusion and the continued pressure tourism related industries struck by significantly within the community.