KPMG FIPS Survey 2016

FIPS

Financial Institutions Performance Survey

Review of 2016

February 2017

kpmg.com/nz Contents

2 The Survey 80 Non-banks industry overview KPMG’s Financial Services team provides 4 A KPMG view from the editor 82 Non-banks – Industry overview 8 Banking industry overview 90 Looking back at the non-bank sector focused and practical audit, tax and advisory 10 Registered banks – Industry overview 92 Non-banks – Timeline of events 20 Registered banks – Timeline of events 94 Financial Services Federation services to the insurance, retail banking, 24 Registered banks – Sector performance 96 Non-banks – Sector performance 34 Registered banks – Analysis of annual results 102 Where is P2P lending at today? corporate and investment banking, and 42 Major banks – Quarterly analysis 104 Non-banks – Analysis of annual results investment management sectors. 46 Review of bank directors’ attestation regime 108 Cyber security: It’s not just about technology 48 Sustainable performance requires good conduct 114 Registered banks – ownership and credit ratings 50 More legislation? Success is all about 115 Non-banks – Credit ratings Our professionals have an in-depth customer-centricity 116 Non-banks – Ownership understanding of the key issues 54 Transforming the agri‑food industry 117 Descriptions of the credit rating grades 58 Customers drive banking innovation 118 Definitions facing financial institutions. 60 Get ready to embrace digital disruption 119 KPMG’s Financial Services Team 62 Blockchain – time to understand the value 120 Contact us 66 IFRS 9 – Rising to the challenge Our team is led by senior partners with a 70 Generating a leading house price index 72 Productivity is a strategic imperative for wealth of client experience and relationships New Zealand banks 74 What FATCA, GATCA and other tax changes will mean with many of the market players, regulators 76 Banking industry forecasts and leading industry bodies. 2 | KPMG | FIPS 2016 FIPS 2016 | KPMG | 3 The Survey

As with all previous FIPS Surveys, The KPMG Financial TABLE 1: MOVEMENTS the information used in compiling our Institutions Performance Who’s out Who’s in analysis is extracted from publicly Survey (FIPS) report of 2016 Banks: 251 —— Nil —— Nil available annual reports and disclosure represents the 30th year statements for each organisation, with —— GE Capital —— EFN (New Zealand) Limited the exception of certain information KPMG has provided in-depth Non-banks: 23 —— The Warehouse Financial —— LeasePlan (New Zealand) provided by the survey participants. insights into New Zealand’s Services Limited A limited number of participants banking and finance sector. provide us with audited financial th statements that might not otherwise In this 30 edition publication be publicly available. we will be presenting industry Bank of China) are still in the early EFN (New Zealand), formerly part of stages of their development, we may GE Capital’s Equipment Finance and We wish to thank the survey commentary and analysis continue to see further accelerated Fleet Solutions Division, is one of the participants for their valued on the performance of the growth and it may be some time entities that acquired a portion of GE contribution, both for the additional New Zealand registered before this begins to normalise. Capital’s loan book and because of information provided and for the Of particular future interest for these that, we welcome EFN (New Zealand) time made available to meet and banks and non-bank financial entities will be the impact of the dual to this year’s publication as they discuss the industry issues with us. institutions, together with a branch, subsidiary registration recently have met the $75 million threshold Without these valuable meetings with Executives the document range of topical articles from announced by the RBNZ. for inclusion. The remainder of GE Capital’s loan book was acquired would lack a lot of the colour and Follow the announcement of its other key stakeholders such by two large entities, whom we deep insights that it does. Massey withdrawal from New Zealand, hope to welcome into the survey University continues to be a key as industry experts, regulators Deutsche Bank has relinquished its from next year onwards when contributor to the compilation of this and our own business banking license to the RBNZ in August they will by virtue of being large for publication, assisting with the data of this year. However, this year will line leaders. two years be required to file their collection, as well as drafting the be the last year of its inclusion as part financial statements. banks’ profit forecasting section of of our banking sector analysis, with this survey. We thank them for their 31 December 2015 being the last The Warehouse Group Limited’s continued contribution. The survey covers registered bank annual financial statements available acquisition of The Warehouse Financial and non-bank entities with balance for Deutsche Bank. Services Limited from Westpac, has External contributors continue to dates between 1 October 2015 and meant that the financial performance play a vital role in our publication, For the non-bank sector participants, 30 September 2016. As a result, of Warehouse Financial Services providing insight on key issues the threshold for inclusion in this entities with the balance date will now be consolidated under The and developments that we might survey has remained unchanged of 31 December will have their Warehouse Group’s 31 July 2016 year- not otherwise have. We would like from the prior year at total assets 31 December 2015 financial results end financial statements. Hence, The acknowledge the contributors from The of $75 million. In total, the non- included in this year’s survey as Warehouse Financial Services Limited Reserve Bank of New Zealand (RBNZ), bank sector comprises of 23 survey their most recent results. Those will no longer be included in the survey the Financial Markets Authority (FMA), participants that are involved in an affected include Bank of China, China due to the absence of publicly available New Zealand Bankers’ Association array of activities, including equipment Construction Bank, Citibank, Deutsche standalone financial statements. (NZBA), The Financial Services Bank, Industrial and Commercial financing, vehicle financing, consumer Federation and the Real Estate Bank of China, JP Morgan Chase loans, working capital loans, and The sale of Fisher & Paykel Finance Institute of New Zealand (REINZ), for Bank, Kookmin Bank, Rabobank residential mortgages. to FlexiGroup (New Zealand) Limited their exceptional contribution towards has not affected the way Fisher & and The Hongkong and Shanghai Following developments from the compilation of this publication. Paykel is presented in the survey this Banking Corporation. the previous year, we see the year, however it will have an impact We have supplemented their external departure of GE Capital and The As this year marks the first full year of next year. thought leadership commentary on financial reporting from Bank of China Warehouse Financial Services from the industry with some of KPMG’s and China Construction Bank, we hope this year’s survey. Having sold off In addition, we also welcome own business line thought leadership. the comparative figures presented its New Zealand operations in 2015, LeasePlan New Zealand Limited We trust you find the content of this will help develop a better sense of the GE Capital has since transferred to this year’s publication. We have survey of interest. potential size of these two growing the majority of its loan books to its included all prior year comparatives banks. However, as the Chinese banks new owners, and as such do not for LeasePlan to ensure consistency (including Industrial and Commercial have any loans to report on at its and comparability between most recent year end fiscal date. reporting periods.

As I sit down to write the At the beginning of the year, funding The key takeaways from the 2016 year —— One factor we have seen near This was not seen as sustainable channels started to tighten and become that are highlighted by the survey are the end of the 2016 and early and was in part behind banks’ editor’s letter, I look back over more expensive. This was followed by as follows: 2017 is the beginning of what actions to slow lending. This in 2016 and what has truly been a series of successive slumps in dairy some wrongly refer to as ’credit turn led to an increased focus —— One thing that continues to prices at the Global Dairy Trade auction. rationing’. There has been a clear on local deposits and increased a year of volatility and change underpin the banking sector’s Fortunately, later in the year, global dairy message from the major banks competition in that part of performance is the strength of its that perhaps offers a window prices have rebounded. that New Zealanders cannot the market. balance sheet. into a future where increased expect lending rates to continue —— One area that always provides On the geo-political front, there was —— This year is the first year for to fall nor to borrow at the same animated discussion is regulation. volatility and pace of change turmoil all over the world as ruling seven years that we have seen exuberant levels. A combination of The current period has been no will be the norm. governments received clear messages a reduction in sector profitability increased funding costs, regulation exception. At present the single from citizens that they were not compared to the prior year. This limiting the amount of funding an biggest area of concern in the being listened to. First there was was caused by a reduction in non- Australian parent can provide to regulatory space is in relation to Brexit and then late in the year, the interest income combined with a New Zealand subsidiary, and the RBNZ’s revised outsourcing election as US president of a billionaire increases in the impaired asset concern around the overheated policy. It would be fair to say that businessman, talk show/reality TV host expense and operating costs. The property market has caused the Bank Executives are still nervous who prefers rhetoric over facts and decrease in non-interest income banking industry to start to prepare about where this might ultimately John Kensington uses Instagram and Twitter to espouse is understandable as this is a New Zealanders for rising interest end up. A fortnight ago the RBNZ Partner – Audit his policy. In New Zealand our own very volatile line in the sector’s rates and publicly warn that further issued its final outsourcing policy Head of Banking and Finance Prime Minister resigned, a new income statement. The increases Official Cash Rate reductions are proposal. There are very clear KPMG Prime Minister was appointed and in impaired asset expense is also unlikely to be passed on. At the sides to the argument around subsequently an election date was set understandable given where heart of all this, is a realisation outsourcing with the banks saying for 20 September 2017. we are in the economic cycle that returns on assets and equity “we have outsourced services to and the fact that a lot of that While all of this was going on, funding in the sector have slipped to an centres of excellence and in doing growth was driven by collective was becoming more difficult and more unsustainable level. so have improved the quality of provisioning increasing in line with expensive to obtain and the fourth —— Probably one of the most control and the service, and have balance sheet growth combined industrial revolution was impacting outstanding illustrations of this taken significant costs out of the with industry specific overlays, us faster than ever. was illustrated when within New Zealand financial system”. particularly in the agri-sector. The 48 hours of the Reserve Bank of “If we are made to bring these Despite all of this, the New Zealand increase in operating expenditure New Zealand (RBNZ) publishing centres back on shore, we will economy has remained strong. is a combination of the regulatory a consultation paper on the unfortunately duplicate and bring Immigration, tourism, and the non-dairy impost and the need to innovate 19 July, the four major banks and back to the New Zealand economy primary sector have all performed well. for the customer. Unemployment is at an all-time low and Kiwibank immediately announced those costs previously removed —— This year the sector margin New Zealanders are feeling reasonably a voluntary adoption of the new and there is no guarantee that decreased 13 basis points (bps) confident about their future. 60% loan-to-value ratio (LVR) the quality of service from the from 2.28 to 2.15%. This was restriction. This was further backed on-shored centre will match the Some of the concerns expressed in primarily caused by less relief on up by a number of banks deciding off-shore centre”. 2015 about an Asian (Chinese) market the funding side of the balance that in the future foreign income —— The RBNZ’s position, which collapse have proven unfounded. sheet and intense competition would not be included in the has largely prevailed in the final Despite that 2016 was the year on the lending side. affordability calculations. policy is that they have a desire of volatility and change. —— Asset quality has continued to be —— This all came at a time when the to see locally incorporated banks strong with the total provision to structural relationship between being able to be managed totally average gross loans and advances deposits and loans had become onshore. In the event that is ratio showing a slight improvement seriously out of balance. During required, they would not want of 3 basis points from 0.58% to the period June, July and August, a situation where they were reliant 0.55%. However, over the same the major banks saw a significant on an offshore centre under the period the impaired asset expense increase in lending and at the jurisdiction of another regulator. has increased. same time a significant decrease in deposits such that a significant system deficit was needed to be funded from offshore lending.

Looking to the future, the banking It will be interesting to see if the This was surprising because the sector is facing a time of increased same happens in our election New Zealand financial sector has challenges, volatility and uncertainty. in September of this year. had its share of questions raised albeit none of them as significant —— In the near term, securing of —— The constant threat of disruption as have occurred overseas. funding at favourable prices will and the growth of digitalisation Conduct risk is an ever changing be exercising all Executives’ minds. in the banking sector will only picture with things that are seen as build in pace. All Executives —— The global market is more volatile acceptable business practice today have said that they will further due to the various geopolitical being considered inappropriate digitise their offerings and they issues that it is facing. Nothing in the near future and their will look to partner with Fintech makes markets more expensive identification and public shaming entities to do so. They readily than a degree of uncertainty as is not only swift if via social media, acknowledge that a Fintech to what might happen. but near impossible to control. partnership is the way forward as One factor that is very clear in —— In addition, locally the regulatory they do not have the resources relation to conduct risk is there space has some water to go under or the time to develop many needs to be a definite move from the bridge, whether it be in relation propositions required on their own ‘customer service’ to ‘customer to the implementation of the new and partnership is the best way experience’. Customer service is outsourcing policy, the review of to ensure that they stay abreast about the customer getting service the Financial Advisor’s Act, or the of the latest developments. quicker. Customer experience is RBNZ’s capital and liquidity review. Executives agree that the most ensuring that customer needs —— One exciting piece of regulation likely disruption will come in the are being fully understood before released in late December was payment space. anything is suggested as a solution the ability for non-systemically —— With disruption, the risk of cyber and, that the customer is not important foreign banks to have crime increases. Customers only sold a product quickly, at the a dual registration. For some of expect entities to have their data appropriate price, but it is still a those players, this is an exciting and other sensitive information product that serves their best business opportunity and it will needs and provides them with be interesting to see how it protected against cyber intrusion. what they want. This is a subtle, translates into competition within As more channels and apps are but important change. the banking sector. opened and different services are offered, all of these channels and When you sit back and look at what has —— On the global stage, there are services require appropriate cyber happened in 2016 and what potentially a number of significant matters protection. One thing is certain; lies ahead in 2017, the clear messages that will impact the sector. Firstly, those on the other end of the cyber are – expect volatility, expect change, the geopolitical turmoil that has crime line are only increasing their and expect the unexpected. All of these been caused by the likes of efforts to hack into, steal private are circumstances that both threaten Brexit and the US elections will data, and create embarrassment. over the next year or two start to and provide tremendous opportunity play out. In addition, as elections —— The other major area where we will to the banking sector. 2017 could be occur in other countries, it will be see a significant impact in the future a very interesting year. interesting to see what happens. is line the area of conduct risk. It is clear from recent election Surprisingly throughout this survey results that there is a significant the Executives we spoke to thought section of the global population that their entities were well placed that are not happy with their lot and in relation to conduct risk. While possibly have lost interest in the they acknowledged that many of facts of the situation and rely more their parent entities had issues on Facebook, Twitter, and Instagram in this area, they did not see the to find out what is going on and are New Zealand landscape as being quite prepared to protest vote to one that was fraught of examples send a message to the leadership. of inappropriate conduct risk.

Banking industry overview

Decrease in profitability as the 1 MOVEMENT IN NET PROFIT AFTER TAX TABLE 2: REGISTERED BANKS – PERFORMANCE TRENDS result of a reduction in non- Impaired asset Operating interest income and increases $MILLION Net profit after expense/ Increase in Increase in net expenses/ 6,000 Year tax/Average Interest margin Average gross in the impaired asset expense total assets profit after tax Operating total assets loans and income and operating costs. 5,000 advances

2016 7.03% -6.46% 1.00% 2.15% 39.39% 0.12% 4,000 The New Zealand banking sector 2015 10.20% 6.94% 1.16% 2.28% 37.32% 0.12% experienced a contraction in 3,000 2014 5.28% 20.41% 1.17% 2.24% 39.44% 0.08% profitability as net profit after tax 2013 1.15% 8.53% 1.00% 2.26% 42.05% 0.16% (NPAT) declined by $334.38 million 2,000 (6.46%) to $4.84 billion (see Figure 1). 2012 0.78% 14.12% 0.93% 2.26% 44.40% 0.22% Four of the five major banks (ANZ, 1,000 BNZ, Kiwibank and Westpac) 2 011 4.51% 10.04% 0.84% 2.23% 43.62% 0.30% contributed a total decrease of 0 $400 million, while Commonwealth 2015 NET NET NON- OPERATING IMPAIRED TAX 2016 NET Bank of Australia New Zealand (CBA) PROFIT INTEREST INTEREST EXPENSES ASSET EXPENSE PROFIT As competition in the banking industry In some cases, Executives were left Executives noted that they have reported a 4.25% ($37 million) growth AFTERTAX INCOME INCOME EXPENSES AFTERTAX continues to build and margins are to wonder if any profit was being made already encountered instances of fraud in NPAT for the year. The other (non- squeezed, return on equity (ROE) and on such deals, and if such deals were in this respect. However, at the same major) banks also produced some return on assets (ROA) levels have only being made in the interest of time, a smaller group of Executives This does not come as a surprise, However, many Executives we notable movements in profitability with fallen over the past year. The banking retaining market share, retaining a key wondered if this was an opportunity given the extent of volatility that spoke to felt that funding pressures The Bank of Tokyo-Mitsubishi, HSBC sector saw its ROE and ROA decline customer or for some other reason. for them, particularly if through their was experienced in the global from rising interest costs offshore global network, they were able to and TSB Bank contributing an increase by 200 bps and 16 bps, to 13.96% and They also wondered how long they financial markets this year. Increased and a more competitive local verify the income. of $81.20 million to NPAT, while 1.00%, respectively. The decreases could be realistically maintained. operating expenditure also had a deposit market, as well as the other Deutsche Bank and Rabobank saw in ROE and ROA played a large role in notable effect on NPAT levels this measures such as LVR limits and However, as the banking industry Executives of smaller banks were NPAT levels decline by $18 million and why banks have scaled back lending year, as operating expenses (including restriction on foreign income in entered into the second half of 2016, eager to comment on new LVR $36.56 million, respectively. growth in recent months, as they look restrictions for residential property amortisation) climbed $223.42 million, affordability calculations, could slow things took an interesting turn with for deals that are appropriately priced investors and owner occupiers and The single largest factor in this or 4.56%, to $5.12 billion. Of the lending growth in the upcoming year. developments that were not fully as opposed to primarily looking for what they see as a distinctive change year’s performance was a reduction 21 survey participants, 16 reported anticipated. It began in June with Asset quality remained strong, with loan book growth. These decreases in the behaviour and attitude of the big in non-interest income of 11.19% higher operating expense (including announcements from each of the total provisions over average gross are also a reflection of an increasingly four banks in the local market. There ($350.20 million). ANZ and BNZ amortisation) in the current year due big four New Zealand banks that loans and advances showing a slight challenging environment where banks is a general consensus amongst those reported a decrease of $510 million to larger personnel expenses and the they would impose restrictions and improvement of 3 basis points (bps), are finding it more difficult to maintain Executives that the big four banks are in non-interest income, which was continued investment in technology exclude foreign income for affordability from 0.58% to 0.55%. However, current levels of earnings. The cost showing less interest in competing partially offset by a $160 million and digital capabilities. calculations on home loans to foreign impaired asset expense experienced pressures of growing regulatory for some deals in certain areas of the increase from CBA and Deutsche buyers following the steps that were Sector margins were also impacted. an increase of 4.93%, or $21.59 million compliance, increased competition, lending market. One of these areas Bank. Of the $160 million increase, Interest margins for the year were to $459.60 million in the last year, volatility in markets and the costs taken by their respective parent is the mortgage market, where fewer CBA contributed $76 million. However, down 13 bps, from 2.28% to 2.15%. which is in line with lending growth. associated with staying digitally companies in the Australian market as cash offers and incentives have been due to a reclassification of income Net interest income was lifted by competitive are examples of the current early as April. offered or where they are, they are not between net interest income and non- 1.36% (or $127.41 million), as a challenges the industry is facing. occurring to the same extent as at the interest income in the 2016 financial Many Executives spoken to across result of interest expense declining The cost pressure of growing beginning of the year. year by CBA, using restated 2015 a range of large and smaller banks by $1.48 billion (10.55%), offset by regulatory compliance, increased The industry remains highly financial year figures would result in a commented that the inclusion of Commercial property investment is a $1.36 billion (5.79%) decrease in competition, volatility in markets competitive smaller increase of $47 million for non- foreign income in an affordability another area that banks are seeing interest income. Lending growth for and the costs associated with interest income. The fall in non-interest The first half of the year showed the calculation was difficult to verify less ferocious competition. The RBNZ’s the banking sector was at its fastest staying digitally competitive are income for ANZ and BNZ stemmed banks continuing to demonstrate – in particular, the level of foreign November 2016 Financial Stability pace in the last eight years, with loan examples of the current challenges from a decline in trading income and a continued desire for loan growth. income being declared, the validity of Report notes that bank credit to the books this year growing by 8.10%, the industry is facing. unfavourable movements of financial This was embodied by what some supporting documents being provided, commercial property sector grew at from $366.04 billion to $395.71 billion. 2 instruments (mainly cash flow and fair of the Executives described as overly- and its source (for the purpose of anti- around 10% in the year to September value hedging derivative instruments). generous offers around interest rates money laundering regulations). 2016 and it is forecast that this type of and other incentives, in order to secure lending will continue to increase. a deal.

This meant that, cumulatively, the big All these factors have prevented them TABLE 3: REGISTERED BANKS – NON-PERFORMING LOANS 2013 2014 2015 2016 four banks in New Zealand will have from doing all the deals that they Past due assets to gross loans and advances 0.27% 0.19% 0.19% 0.13% to return billions of dollars in funding wanted to, especially those in the area to their Australian parents over the of corporate lending, construction and Gross impaired assets to gross loans and advances 0.87% 0.66% 0.48% 0.37% Executives from the banking industry next few years. These banks will infrastructure projects. have, in recent months, signalled the Total 1.14% 0.85% 0.67% 0.50% have to then turn to the local deposit financial market to expect slower loan market or offshore wholesale markets growth for the foreseeable future, and to replace those funds. This explains a rise in home loan rates, as increased However, Executives noted that they While some may label these recent Higher funding costs some of the competition that we are funding costs persist through the are looking more closely at the deals developments (restriction on foreign expected due to increased seeing in the retail market. In addition, In relation to the local retail deposit upcoming year. While new loans will increased global uncertainty as a that they are prepared to lend on income, early implementation of new global uncertainty markets, the banking system noted be funded by more expensive funds, and ensuring that those deals that loan-to-value ratio (LVR) rules, and the result of geopolitical issues around that between the months of July it might be some time before the While the highlights of last year’s are being funded are ones that will pulling back of the bank’s presence in the globe this year have meant that to August it had witnessed a large effect of the interest rate repricing survey were cheaper funding, tougher provide an appropriate return at an certain areas of the lending market) access to cheap offshore funds outflow in deposits as investors were comes through to the financials due competition and tight margins, the appropriate risk. as credit rationing, Executives have began to dissipate as investors had liquidating their deposit holdings in to the current funding mix of existing clarified that it is about being smarter banking industry news in the latter to be compensated with higher-risk favour of other investment classes, The Executives also commented interest-bearing liabilities (i.e. fixed in terms of using their capital when half of this year has been filled with premiums for access to their funds. whether they were investment that lending practices/policies were vs. variable interest rate terms deciding who they are lending to, as headlines about funding pressures At the same time New Zealanders’ property purchases, funds or shares. due for a much-needed change on borrowings). they are still very much willing to lend and how they were affecting the appetite for borrowing was increasing. At the same time, the appetite for as they had started to see certain to customers if the deal is right and way banks were having to compete. lending increased significantly, creating lending deals that were pushing On the other hand, increased Digitisation and disruptors it makes business sense. This means This year, the banking industry had to a gap that had to be funded offshore. ROE, ROA and return on investment competition with other competitors for focusing lending growth strategies notably scale back on lending growth One area that we see digitisation (ROI) triggers. This prompted banks local deposits is also putting pressure One other area that the banks identified on existing key customers, and on during the second half of the year, having a profound effect on within to start taking a closer look at the on funding costs as the banks potential customers with strong amidst concerns of funding constraints as an issue this year is the spate of the industry is in the use of branches. ROA, ROI and the capital impacts compete to attract adequate funds opportunities and a solid credit rating. leading to issues with capital levels, successive OCR cuts. Executives A banking expert from Massey of the deals that they were starting from the local retail market. Executives have stressed that the and with ROA and ROI triggers have commented that the OCR cuts University estimates that over a to see and to consider whether it key to effective resource allocation being met as a result of low margin placed them in a tough predicament period of five years, approximately was appropriate and sustainable to lies in pricing loans correctly (in terms deals and an increase in the outflow in the public eye. They were unable 150 branches of New Zealand’s major be doing such lending. It appears 3 of interest rates), to ensure that of funds that was not matched by to reduce deposit rates due to a banks have been closed. The report banks are no longer ‘falling over each they have sufficient funds to lend to deposit growth, thus forcing banks to decline in the volume of deposits, does not mention if this was driven other’ to do every deal. Furthermore, the people that they really want to fund offshore. All this occurred at a In addition, the new dual registration because of already low rates, and at by the expansion of digitisation or the Executives pointed out that this lend to, principally those who have a time when there was also the desire for small foreign banks, which has the same time they could not reduce digitisation replacing these services recent change in behaviour could bankable proposition. to bolster capital and local deposits, been in force since 21 December home loan rates any further as they (which is a common theme). also be better characterised as a especially for the subsidiaries of the 2016, could lead to more competition, were already under margin pressure shift in their strategic focus, from an As the larger banks continue to adjust Australian banks. as foreign banks that are currently not and starting to hit ROE and ROI limits. approach that meant competing at their operations to be in alignment systematically important will have the In the event that there are further OCR all costs for additional businesses to with their new growth strategies there opportunity to enter the local market. cuts, the banks have already intimated being more mindful of maintaining/ might be a slight easing of competitive As foot traffic into branches is on the Many of the small foreign banks have publicly that they will be unlikely building capital levels, and the return pressures from these banks on certain decline, Executives are beginning on capital being achieved on new types of lending. However, we can still expressed interest in applying for a to pass on the cuts to borrowers Many of the developments that we to question the relevance of having businesses. This focus, in many cases, expect significant competition in the branch licence, particularly the three for reasons explained above. The saw in the second half of the year, branches, particularly in their current has been driven by a general desire banking sector in areas where good Chinese banks. Executives of small Executives reiterated that contrary to as discussed in the competition form. They have gone on to give to strengthen capital measures and margins can be found, and the risk foreign banks have stated that their publicly-held beliefs, the movements in section, can be explained by funding an example of how today’s typical by some parent country regulatory levels are appropriate. interest in a branch license is the home loan rates should be considered constraints that began impacting customers are only visiting their initiatives that will limit the Australian result of current funding limitations in the context of a myriad of factors, Despite no indication of strong branches one or two times year, as parent bank lending to its subsidiaries. the New Zealand financial market imposed by their parent companies, and not solely on the OCR movement. competitive pressures easing in the they move on to online banking to fulfil late last year. The first of these via directives, conditions of Factors to consider also include, but Recent tightening of the lending near future, the RBNZ and the banks their daily banking needs. With that were the new Australian Prudential registration and/or the RBNZ’s are not limited to, the banks’ current criteria by certain banks was also have signalled the market to expect in mind, Executives have recognised Regulation Authority (APRA) capital Orders in Council which restrict the funding mix (i.e. the combination of made in consideration of several interest rate hikes in the upcoming that there is a need to transform their requirements that restricted level of related party borrowing and onshore and offshore funding), the factors, including a significant year. They have cited upward branding into one that stresses the Australian banks from lending more lending that can occur, and capital availability of funds for immediate reduction in the availability of cheap pressures from funding costs and use of online banking, via a device than 5% of level 1 tier 1 capital to adequacy requirements. disbursement, and strategic goals (e.g. funds, increasing geopolitical and funding imbalances in New Zealand such as a mobile phone or a tablet, their subsidiaries in New Zealand. attracting only quality loans with the global economic uncertainty, and a as the biggest driving factors behind as the focus of their new brand image. use of interest rate pricing). severely overheated housing market. the increase.

For most people, at the moment the This is an area where they see the While it is easy to say that the banks The issue of cyber security is focused first thing that comes to mind when greatest potential for a Fintech need to establish partnerships with on ensuring that all necessary and they think of a bank is often a bricks disruptor to enter their industry, Fintech companies in order to survive appropriate security policies and and mortar branch, and this is what and to supplement it with tools and impending disruption, it is also procedures are in place and are Executives are hoping to change. platforms that will enhance the user’s important that they are partnering working effectively. While safeguarding customer privacy/data from potential However, one local New Zealand purchasing experience with a more with Fintech companies that have the elegant form of interaction and shorter right skills and knowledge to develop cyber criminals is a crucial element bank argues that operating a branch of cyber security, equally important is not necessarily a disadvantage response times, with a reduction of applications/tools that will seamlessly the current costs. As New Zealand blend into their core IT systems. is ensuring that the new digital and is keeping its branches open. systems and channels being added has one of the more efficient and The local bank is using branches to Technology innovation will continue to are able to interact seamlessly with advanced economies in the world, its advantage, after having listened change how banks operate. A KPMG core IT systems. In a fast-changing some Executives have questioned to its customers about the kind of report predicts that by 2030, digital technological world, cyber security if there is sufficient margin available products/services that they value transformation will drive an even risk has increased exponentially due to the most from their bank. What they to entice Fintech companies to deeper fundamental shift in banking the complexity and the unpredictably have heard is that their customers are make a genuine effort in building an – moving it from being hidden to of a cyber event, and as such, it placing tremendous value in having a information technology (IT) application completely invisible. However, it remains on the top of the agenda for branch in their local community, and that will achieve the list of things that will be more intertwined in the lives financial institutions. in developing long-term and close we have mentioned above. While most of consumers than ever before. relationships with their personal Executives think that New Zealand The KPMG report ‘Meet EVA, the may not be a target in the first wave, Regulation in a continually banker by getting to know the branch future face of the Invisible Bank’ changing risk landscape staff, and dealing with the same staff they acknowledge they must look into says that ‘this Invisible Bank will be It has certainly been another busy on a consistent basis (as opposed to and invest in similar technologies as buried within a broader, more digital, year for regulators as the RBNZ has being served by a new staff member the impact of these technologies will connected way of life. Consumers introduced several policy initiatives every couple of months due to high be global. will interact with a personal digital assistant’. According to this vision, and pieces of legislation. These include employee turnover). What it has been As the world around them changes large parts of the traditional bank the dual registration policy for small trying to achieve with the use of due to new Fintech technologies, could disappear. Customer service call foreign banks, the revision of LVR branches is to increase the level of the Executives are not sitting idly by centres, branches and sales teams, rules, updates to AML/CFT guidelines personal contact with its customers, waiting for a disruptor to take away for large parts of the market, could for banks and the publication of enhance the customer experience their margins or indeed their business. be a thing of the past. The transition several consultation/discussion with a personal touch to every service Many are in talks with Fintech will not be easy. The winners will be papers, including the stress-testing delivered, and ultimately create companies to find common areas those that are able to utilise their methodology for New Zealand customer loyalty. where they can work together and data, drive down costs, build effective incorporated banks, a proposal on The Executive of the local bank does build an application/tool that will give partnerships with a broad range of the dashboard approach to quarterly admit that their success in this area them a competitive advantage against third parties, and of course, those with disclosures for banks, and the review can be attributable to the fact that their other banks. robust cyber security.4 of the outsourcing policy for registered banks. Executives perceive that main target market tends to be part Nearly all Executives see the RBNZ is becoming increasingly of the older generation who may not partnering as the way forward. In cautious about the banking system’s be as technologically savvy, and their doing so, they have said that the liquidity and credit quality. focus is on providing better customer biggest challenge so far has been As the banking industry begins to service as opposed to profitability. to find the right Fintech company to prioritise the adoption of new Fintech The RBNZ’s apprehension in this area technologies and transition its business is understandable, given its role is to When asked about the topic of partner with. What is happening is operations to online platforms, ensure the continued integrity of the disruptors and how they see that they are noticing a significant Executives see privacy and security banking industry by keeping exposures them developing in New Zealand, number of Fintech companies that are developing and selling as a key consideration for them. The to internal risks to a minimum. Executives are in agreement in topic of cyber security is continually saying that disruptors will likely applications to other companies, On 19 July the RBNZ published only to find out later that they discussed throughout the digital emerge in the payment space. transformation process, even after the a consultation paper, proposing do not necessarily interact well completion of its implementation. to increase LVR limits nationwide with their in-house systems as for both residential property they lacked the understanding of investors and owner-occupiers. how their systems work.

Within 48 hours of the release of the Following strong feedback from The RBNZ said that it would consider The bank is first required to provide Recent regulatory developments Dealing with conduct risk does not consultation paper, all of the major the banking industry to the original whether there are benefits in a convincing argument as to why it are seen as efforts by the RBNZ have to be an onerous undertaking if banks, including Kiwibank, responded proposal issued in August 2015, the harmonising New Zealand’s approach requires a branch license (i.e. what to fine-tune the current legislative banks are able to embed it as a key by issuing statements announcing RBNZ released a revised proposal with the liquidity standards developed activities does it plan to undertake frameworks, and many survey pillar of their core business objectives. the immediate and voluntary adoption in May 2016 to alleviate some of the by the Basel Committee on Banking under a branch license that it participants are of the opinion that all To translate this to business terms, of the 60% LVR restriction on all concerns raised. In the revised May Supervision. Another major change otherwise cannot or would have key/necessary regulations have now this means having business goals new mortgage lending deals to 2016 proposal, the RBNZ has since in this respect is the implementation significant difficulty in doing so either been put into place. that are first and foremost driven by as a subsidiary or through its parent). the need to focus on understanding property investors, as proposed by recognised the need to allow the of new Basel III requirements that Key developments that the registered Additionally, it would also have to the customer’s needs, and then the RBNZ. With support from the outsourcing of certain non-essential are set to phase in during a six-year banks can look forward to in the demonstrate an ability to identify the developing suitable strategies and major banks, the RBNZ confirmed the functions, provided the bank has phase‑in period, from 2013 to 2019. upcoming year are as follows: implementation of the proposed LVR backup capabilities and is able to The RBNZ’s review will also touch risks involved in operating a branch products to meet them. It is when restrictions, with the effective date of demonstrate direct control and the upon the new requirements to and construct a clear and effective plan 1. Following the International the following is done out of order (i.e. 1 October 2016. Many of the non- ability to operate the outsourced determine if adjustments to its on how it intends to either mitigate or Monetary Fund’s (IMF’s) visit developing products/services before major banks, especially Executives of function (independent of related liquidity policy will be required so address those risks. in August and November 2016, getting a clear grasp of the customer’s as part of its Financial Sector needs) that a banks runs the risk of small foreign banks, have mentioned parties and/or its parent). that the standards of its policy The RBNZ did initially have some that the new LVR restrictions have frameworks are kept aligned with Assessment Program (FSAP), either products/services that do not As an update to this issue, in February reservations about the dual registration not affected them operationally as international standards. a formal report of key findings align with the needs of the customers. 2017, the RBNZ released a final policy system. The RBNZ believes that they had only been doing loans at is expected to be published by paper concerning the revision of its With the upcoming capital and allowing a dual registration system Part of understanding the customer’s 60% LVRs or less. For small overseas the IMF in the first half of 2017. current outsourcing policy. Although, liquidity review, Executives are could drive increased volatility wants/needs also involves banks, this restriction (i.e. 60% LVRs) New Zealand was last reviewed no specific dates have been given as hopeful that the RBNZ will review in capital inflows and outflows, recognising that the average person’s has long been driven by directives under the FSAP in 2004. to when this would start. The RBNZ the methodology by which the banks compromising New Zealand’s financial notion of what customer service is from their offshore parents, as a plans to hold another consultation are required to calculate their capital stability. However, the RBNZ also 2. As discussed above, the RBNZ today has changed. It has evolved to measure to control credit risks from on an exposure draft for a new ratios. The Executives explained that sees the benefits of the use of a will begin a review of its policy a point where the ‘overall customer foreign operations. BS11 (of The Banking Supervision New Zealand’s policy framework dual registration system, with better framework in the upcoming year. experience’ has become the product The proposal for a revised outsourcing Handbook). For a high level summary for capital requirements applies a access to funding the key benefit The review will be focused on that banks are trying to sell to their policy has become what is arguably comparing the key features of the more fundamentally conservative with a branch structure is the ability capital and liquidity requirements customers, and where the act of the most debated issue facing the revised and original outsourcing approach that those of APRA and to directly access capital markets that apply to locally incorporated providing a service (i.e. customer banking industry at the moment. policy, see appendix one of the Basel. Executives argue that if they more cheaply and easily than a local banks in New Zealand. service) is just a small component of This is largely due to the cost of its ‘Summary of submissions on the had performed their capital ratio subsidiary, given a branch shares the the overall customer experience. It is implementation, which the banks Consultation Paper’.6 calculations based on methodologies parent’s (typically higher) credit rating. Banks continue to look at also becoming apparent that banks have initially estimated to be in the under APRA and Basel, then they Also, it may promote further efficiency and improve their approach not only have to worry about the range of $10 million to $400 million.5 would have achieved a higher and innovation, and better manage to culture and conduct risk repercussions of their activities but capital ratio due to the different However, Executives have emphasised regulatory costs. also about with whom they are being calculation methodology. Due to the lack of measurable outputs associated. In August, the funds that the full extent and scope of the Survey participants are not fond of the Apart from the outsourcing review, the and its exclusion from balanced industry (which includes some banks) proposal is still not entirely clear at this Most recently, in December 2016, fact that there is an increasing amount banks have expressed some interest in scorecards, it is easy to see why was brought into the media spotlight point in time. the RBNZ issued a policy paper of regulation over the banking industry, the capital and liquidity review that the conduct risk may sometimes fail when an investigation revealed that confirming its decision to allow the due to the costs of compliance and RBNZ has planned for the upcoming to get the right level of attention in its default KiwiSaver schemes were implementation of a dual registration resources required, at a time when year. The RBNZ has decided to corporations. Unfortunately, more either directly or indirectly investing system for small non-systemic foreign they are seeking to innovate and regularly review its policy frameworks often than not, conduct risk only gets in unethical companies that are banks. Non-systemic banks are banks where there are multiple pressures While Executives understand the and make the necessary revisions to the attention of Executives when involved in weapons manufacturing, that have not been identified as being on resources, and they see regulatory issue that the RBNZ is trying to them, so as to remain relevant and inappropriate behaviours, whether by tobacco, and nuclear energy.7 systemically important to the overall compliance consuming a lot of these address with its proposal, they argue appropriate in light of changes to the employees or industry competitors, Shortly afterwards, all of the banks financial stability of New Zealand. resources. The banks have accepted that it will result in the duplication international regulatory standards and are brought to the public’s attention, investigated announced that they However, it is also important to point that this is part of doing business of administration services/costs the industry environment. and in today’s environment, it would review or divest from all out that any bank wanting to avail in an industry that represents a key that exist at the group level in the can spread very quickly via the such investments.8, 9 itself of dual registration will have to supporting pillar to the financial New Zealand sector, and are not uncontrolled forum of social media. meet certain stringent requirements stability of New Zealand’s economy, convinced that bringing back-offices, Even as conduct risk goes onto an before it can be approved for a branch and as such further regulation is to which represent well-staffed centres executive’s agenda, it is important registration license. be expected, however, they are not of excellence, back onshore and that that the focus on conduct risk is not anticipating any major legislative quickly lost amidst the prominence they will either result in benefits or works or overhauls to come through actually be able to be replicated. of strategic goals that relate RBNZ’s pipeline. to profitability.

Additionally, Executives have also When one looks back at the list of In reinforcing what we have heard Since our last update in the June According to Executives, an ideal given the example of how the AML/ issues in the industry over the past from non-bank Executives, the banks 2016 FIPS quarterly publication, the DTI level would be in the range of CFT Act has expanded upon the year, this confidence was surprising, also believe that should economic global dairy milk prices continued to 5 to 7. However, they say that most concept of conduct risk by placing as while New Zealand is yet to see disruption impact New Zealand, it will deliver strong gains in the last quarter In the last couple of years, we borrowers are already at levels of 9 to a burden of expectation upon the a serious issue come to the market, likely come from global events that will of 2016, with the Global Dairy Trade have seen significant changes 12. In addition to this, the banks do banking industry to know who their there have been a number of matters have a flow-on effect in New Zealand. (GDT) index recovering by 21.58%15 in the housing market with the sympathise with young families as customers are (i.e. employment, family that would fall into the conduct However, what they cannot definitively for the three-month period between implementation of tighter LVRs, the the implementation of DTI restrictions and financial background). risk category. The question that anticipate is what that event might October and December 2016. The GDT introduction of a capital gains tax on could effectively prevent them from we would ask is: is this confidence be or when it would arrive in index rebounded by a staggering investment properties sold within two buying a house of their own, and The rationale for this is that in knowing well placed? New Zealand. What we have seen in 54.60% between June 2016 and years (including the requirement for an this could be an unintended social more about a customer, the bank the interviews is a wariness and the December 2016, compared to a 4.66% IRD number and a local New Zealand consequence that the Executives feel should be in a better position to spot return to a very risk-based view of the contraction during the first half of the bank account), the exclusion/restriction that the effect might not have been unusual transactions (i.e. money Outlook of the New Zealand world and New Zealand economy by year.16 In its Global Dairy Quarterly Q4 of foreign income in calculations, adequately researched. The other laundering) and escalate them for economy Executives and, if anything, together 2016 report, Rabobank attributes the and the big four banks shifting their issue raised with the enforcement of further examination in a timely manner. A review of New Zealand’s economy have a slightly cautious approach. return of milk prices during the second strategic focus from loan growth to DTI measures is that it would require can often be a good indicator of the Managing conduct risk is a complex half of 2016 to the fall in milk supply by maintaining/building capital levels. a clear, fair and explicit definition of general health of the banking industry job that involves a multi-layer approach In analysing some of the internal key European and Oceania markets.17 The most recent changes might have what constitutes income and what as it remains closely intertwined with as it involves a range of stakeholders. matters facing New Zealand, it is started to have an impact, as auction constitutes debt, and this is likely several key industries, particularly the They include shareholders/owners, noted that the latest statistics reveal sale rates across the country have something that the banking industry dairy and housing markets. customers, suppliers, surrounding unemployment rates to be at 4.9% fallen notably in the last quarter of and regulators could find themselves 12 communities, and even other for the September 2016 quarter, the the 2016. at odds over. Meanwhile, the RBNZ lowest since 2008. At that level, those industry competitors. It also shows Despite the drop-off in sales, the is still waiting on its formal request to listed as unemployed are likely people that the concept of conduct risk is median sale price of houses sold the government to be granted, that who are not equipped with the right encompassing a wider definition, as Executives have noted that currently in December 2016 was $516,000, would give them statutory powers that skills that the economy requires at recent developments show that it is the New Zealand economy, while not a up 11% from December 2015.21 would enable them to implement DTI this time. no longer just about the conduct of ‘rock star’ economy, is in good a shape It is anyone’s guess how long the restrictions, should they deem them 22 a firm and its employees, but also and there are no current indications to slowdown will last, if it was indeed to be necessary. if the individuals/corporations that say that a recession will come from caused by the latest round of cooling they associate with share the same Fonterra has since increased its inside New Zealand. New Zealand forecast milk payout in November measures put in place, or if it will values and beliefs that the community GDP growth this year was supported continues to have low unemployment by 75 cents, to $6.50 to $6.60/kgMS ‘stick’ this time round. However, we around them deems appropriate. by a rebound in exports earnings that levels, low interest rates, steady GDP (including dividends of 50-60 cents).18 will not really know the answers to With New Zealand being in a good The challenge going forward will be for came mainly from wine, beef, lamb, growth of 3.0% for the year ended Similarly, leading economists at the these questions until New Zealand is position relative to the rest of the banks to actively anticipate new issues 10 fisheries, forestry, stone fruits, kiwifruit September 2016, and its exporting big four banks have also increased back from holiday and the economy world, and largely uninterrupted that might arise from conduct risk and dairy. and tourism industries are performing their forecast milk payout for the is back in full gear. by global events at the moment, that they might not have otherwise well. The one aspect that could Executives have indicated that this thought of, and ensure controls are Moving onto the topic of dairy, current 2016/2017 season to the range impact locally is a fall in immigration, despite having lost its spot as the of $5.80 to $6.25/kgMS.19 Economists might be a good opportunity for the in place to mitigate the risk. Other as this is bringing people (workforce) government to channel more of its issues that conduct risk typically largest earnings exporter to the at Rabobank expect a further recovery and investment into New Zealand. tourism sector just over a year ago,13 of global milk prices in 2017 due to When asked about the resources into developing its ageing encompasses include collusion, anti- infrastructure. Executives have raised competitiveness, information privacy, the dairy sector continues to be a supply constraints, as opposed to implementation of debt to income key cornerstone of New Zealand’s demand factors.20 On another note, (DTI) tools, Executives are in the issue of traffic congestion in and how effective the banks are in Auckland and Wellington as a good escalating and resolving conduct risk economy, with a direct contribution of Fonterra’s success in the international unanimous agreement that the 14 example of drag upon our economic This is not something the industry 5-6% towards total GDP. market has led to the introduction of RBNZ’s consideration of DTI issues when they do appear. growth. Inadequate infrastructure in will need to worry about just yet as winter milk premiums from the winter measures are taking place a bit late in such cases would reduce economic One trend we did notice from talking New Zealand continues to see record- of 2017 onwards, so as to encourage the cycle, as current DTI ratios have productivity and could cause capacity to Executives was that they were breaking net migration figures for additional milk production for a already exceeded levels that would constraints that might hinder future surprisingly confident that their 2016,11 and even possibly for 2017. market that needs to be catered for have been considered ideal. organisation was on top of conduct risk throughout the year. GDP growth. and felt it unlikely they would suffer the same issues other organisations, or indeed their parent had offshore.

• 4th • 23rd • 27th • 29th • Jan. 2016 Moody’s affirms the ‘A1’ long-term The RBNZ releases a 2nd consultation • Jul. 2016 Westpac’s Australian parent, Deutsche Bank AG relinquishes its • 27th rating of all three New Zealand’s paper on its outsourcing policy, with • 19th Westpac Banking Corporation, New Zealand banking licence with Fitch Ratings downgrades the outlook Chinese banks, but downgrades their a revision to the initial proposal made The RBNZ releases a consultation express its offer to borrow at least the RBNZ, completing the wind- of New Zealand’s issuer default respective outlook from ‘stable’ to on August 2015. paper, proposing to increase NZ$250 million from retail investors up of its New Zealand operations ratings from ‘positive’ to ‘stable’, but ‘negative’. This reflects the change to LVR limits nationwide on all new in New Zealand in exchange for (which Deutsche Bank AG announced maintains its ‘AA’, sovereign rating. their parents’ outlook and the China’s mortgage lending. unsecured subordinated fixed last year). rate notes, subjected to unlimited Simultaneously, Fitch Ratings revises current sovereign rating. • Jun. 2016 20th oversubscriptions. The funds raised New Zealand’s banking sector outlook 7th • • ANZ, ASB and Westpac publicly will be used to meet its APRA to ‘negative’. 10th The Co-operative Bank announces its • Sep. 2016 • announce that they will voluntarily not capital requirements. The RBNZ cuts the OCR by 25 bps partnership with Unisys, a global IT accept new loan applications from 1st 28th to 2.25%. company that provides leading-edge • • property investors that do not meet Westpac launches CashNav app, The RBNZ leaves the OCR unchanged IT security to help modernise its core 16th the 60% LVR restriction. However, • Aug. 2016 the product of a collaboration at 2.50%. • IT infrastructure and capabilities. The RBNZ publishes a final report, all pre-approvals will still be honoured, • 2nd with a New York Fintech company detailing the result of the dairy stress • 9th unless expired. Heartland Bank establishes a Share called ‘Moven’. • Feb. 2016 test that began in late 2015. Westpac and ANZ stops lending Sale Plan for shareholders with 21st 5th to foreign property buyers with • holdings of less than 10,000 shares. • 11th BNZ and Kiwibank are the last of The Co-operative Bank sees their • overseas income. Overseas income BNZ acquires a 17% stake in Figured the major banks to voluntarily adopt • Apr. 2016 by New Zealand citizens and residents 11th long-term issuer default rating by Fitch Limited, a cloud-based accounting stiffer restrictions for new lending to • 27th will still be considered, but with a The RBNZ cuts the OCR by 25 bps Ratings, upgraded by a notch to ‘BBB’. software provider that caters primarily • property investors, requiring at least The RBNZ announces that a visit by tighter lending criteria. to 2.00%. to agri-businesses. a 40% deposit. 11th the IMF in August and November • The RBNZ leaves the OCR unchanged 19th Kiwibank increases its phone banking 16th this year can be expected, as part • • at 2.25%. • 22nd Moody’s changes the long-term fees in a bid to encourage customers Westpac reaches an agreement of the ‘Financial Sector Assessment China Construction Bank receives credit rating outlook of the big 4 to use its online banking services for with the Commerce Commission to Programme’. The results of this 10th • an additional $140 million in funding New Zealand banks from ‘stable’ to minor inquiries/matters. refund over $4 million for overcharged BNZ is the third major bank in from its Chinese parent in exchange assessment is expected to be ‘negative’, bringing it in-line to that of overseas ATM card fees. published in a formal report by the New Zealand to halt lending to for 100 million capital shares, 22nd foreign borrowers. their Australian parents. • IMF in early 2017. raising its capital balance to roughly The RBNZ leaves the OCR unchanged $200 million. 23rd 28th 13th • at 2.00%. • Mar. 2016 • • ANZ intends to offer 5 and 7 year The RBNZ leaves the OCR unchanged ASB will no longer lend to borrowers 26th The RBNZ publishes a policy • unsubordinated unsecured bonds, 1st at 2.25%. with foreign income, unless the In relation to an announcement paper, summarising the feedback • with unlimited subscription, in a The Commerce Commission individual is a New Zealand citizen made on June 3, The Co-operative received from its consultation on the bid to raise at least $100 million for completes its review on the level of or resident. Bank raised $15 million through the ‘Publication of Submissions’. each term. competition within the dairy industry, • May 2016 The banking sector in New Zealand offer of unsecured debt securities. and concludes that any deregulation 23rd 5th is recognised as being one of the The amount is half of what it initially 25th • of the Dairy Industry Restructuring • most digitally innovative in the world, sought to raised (i.e. $30 million). The • The RBNZ releases its Former BNZ employees, Ryan S&P’s expresses concern over Act 2001 (DIRA) would give Fonterra according to Forrester, a top global subordinated notes will be issued on consultation paper on its proposed William Writ and Scott Alan McRobie the growing use of interest-only too much power in setting domestic market research company. 28th July 2016. dashboard approach to quarterly agrees to a settlement of $250k mortgage loans in New Zealand, citing farmgate milk prices. financial disclosures by locally with law enforcement, after having that a fall in house prices could be incorporated banks. been uncovered for approving a loan ‘particularly problematic’. for a personal investment property development. No criminal charges were filed.

• 12th • 18th • 12th • Oct. 2016 BNZ confirms that it is currently • Nov. 2016 ASB increases its ‘ASB Notes 2’ Heartland Bank announces its • Jan. 2017 • 1st considering plans to restructure parts • 2nd offering size to $400 million, the intention to raise up to $30 million in • 11th New LVR rules comes into effect, of its business. New Zealand’s unemployment rate maximum amount as stipulated by new capital to support growth and Industrial Commercial Bank of China restricting mortgage lending to falls to 4.9% for the three months its disclosure statement. The ‘ASB digital strategy. $20 million will be joins the New Zealand Bankers’ 13th residential property investors across • ended 30 September 2016, a first Notes 2’ will be issued as scheduled raised through a placement, while the Association as its 16th member. ANZ becomes the first bank in New Zealand with LVR’s greater than since 2008. on 30 November 2016. remaining $10 million will be raised 60% to no more than 5%, and no New Zealand to offer Apple Pay through its Share Purchase Plan. • 20th more than 10% to owner-occupiers for customers with a Visa Debit or • 3rd • 28th S&P’s affirms New Zealand’s with LVR’s greater than 80%. personal ANZ Visa credit card. Following its expression of intent RBNZ formally warns TSB Bank for • 13th ‘AA’ sovereign foreign currency failing to review and to keep its anti- Heartland Bank completes its 17th on 18 October 2016, ASB confirms long‑term rating. 5th • the offering size of ‘ASB Notes 2’ money laundering risk assessment $20 million equity placement, for • Kiwibank partners with ‘i2c’, a The class action lawsuit brought to be $375 million. ASB has issued up to date, between the period $1.46 per share. 31st global provider of personalised • against ANZ New Zealand by ‘Fair Play a warning that ‘ASB Notes 2’ of 30 June 2013 and 9 June 2016. Heartland Bank partners with payment and integrated commerce 15th on Fees’, citing unreasonable late credit is a relatively complex financial TSB agrees to take immediate steps • Spotcap, an online lender for SMEs, solutions, to develop prepaid gift Fonterra establishes a 1.5 billion Yuan card payment fees and unarranged product that is not suited for the to remedy the issue. providing it with a funding facility and travel card programmes that (approx. NZD$216 million) facility overdraft fees, has been settled out-of- average investor. (undisclosed) to support its growth court settlement, with ANZ not having provide features that enhances the agreement with Bank of China, strategy in Australia. to admit to any fault. payment experience. 7th • Dec. 2016 diversifying the funding sources • of its Chinese operations. 25th The Co-operative Bank launches its 1st 7th • new ‘fair rate’ credit card, charging • • Feb. 2017 • The RBNZ announces the release BNZ is the first bank in New Zealand Statistics New Zealand reports annual In a partnership with Xero, Callaghan an interest rate of 12.95% for both 1st of formal OCR projections from to offer Google’s Android Pay service. GDP growth of 3.0% for the year • Innocation and Creative HQ, Kiwibank purchases and cash advances, all for Westpac announces a reduction November onwards. These projections ended 30 June 2016. launches New Zealand’s first Fintech an annual fee of $20. The Co-operative 8th in fees for several of its products will be incorporated as part of its • Accelerator, called the ‘Kiwibank Bank claims it to be the lowest The Co-operative Bank issues an 21st and services. Monetary Policy Statement releases. • Fintech Accelerator’. It is a programme interest rate of any other credit cards additional $30 million in subordinated Following a consultation held in June, 2nd that aims to fund and support the 28th offered by New Zealand banks. notes to retail investors, in a bid to the RBNZ has published a policy • • RBNZ publishes the finalised growth of Kiwi Fintech start-ups. ANZ announces a reduction in several shore-up its capital position. paper confirming its stance to allow of its fees, but claims that it is not 10th dual registration for small foreign policy paper concerning its review 9th • 9th • related to the class action lawsuit by ASB partners with Paymark to launch • banks that are not systemically of the outsourcing policy for ANZ announces that from November RBNZ orders an independent review ‘Fair Play on Fees’ that was settled online EFTPOS. important to New Zealand’s registered banks. onwards, customers will be given out-of-court earlier this month. of Westpac’s capital model, after financial stability. the option to ‘opt-out’ of unarranged The RBNZ cuts the OCR by 25 bps the release of its latest quarterly overdrafts. ASB and BNZ are the only 31st to 1.75%. disclosure revealed that it had • 23rd two other major banks in New Zealand • NZ Post announces the completion of 15th breached its conditions of registration. Fonterra introduces a new price that offers its customers such the partial sale of Kiwi Group Holdings • premium for winter milk contracts BNZ changes the manner in which it an option. Limited (Kiwibank’s holding company) beginning for the winter of 2017. calculates interest on late credit card to NZ Super Fund and Accident • 11th Compensation Corporation (ACC). payments. The changes brings them Heartland Bank’s ‘BBB’ long-term The sale was initially proposed on in-line with how interest is calculated issuer credit rating, with a stable 6 April 2016. at ANZ and Westpac. outlook, is affirmed by Fitch Ratings.

Profits down driven TABLE 4: MOVEMENT IN INTEREST MARGINS 2016 2015 Movement by challenging market 8 MOVEMENT IN NET PROFIT AFTER TAX conditions Entity % % (bps) $MILLION This past year has proven to be a Australia and New Zealand Banking Group Limited – New Zealand Banking Group 2.22% 2.26% -4 6,000 challenging one for the banking Bank of Baroda (New Zealand) Limited 3.48% 3.73% -25 sector as net profit after tax (NPAT) 5,000 Bank of China (New Zealand) Limited 2.21% n/a n/a for the year was down on last year, Bank of India (New Zealand) Limited 3.67% 4.21% -54 decreasing by $334.38 million Bank of New Zealand 2.19% 2.30% -11 (6.46%) to $4.84 billion (see Figure 8). 4,000 The current year’s result highlights China Construction Bank (New Zealand) Limited 1.48% n/a n/a that record profits seen in previous 3,000 Citibank, N.A. New Zealand Branch 1.69% 1.93% -24 years have come under pressure due Commonwealth Bank of Australia New Zealand Banking Group 2.14% 2.30% -16 to competitive pressures, resulting in 2,000 Deutsche Bank AG, New Zealand Group -3.03% 1.66% -469 margins being squeezed, and volatility Heartland Bank Limited 4.79% 4.89% -10 in global markets making funding both 1,000 Industrial and Commercial Bank of China (New Zealand) Limited 0.89% 0.82% 7 more difficult and more expensive JPMorgan Chase Bank, N.A. New Zealand Branch 0.85% 0.77% 8 to raise, all at a time when both loan 0 impairments and operating expenses 2015 NET NET NON- OPERATING IMPAIRED TAX 2016 NET Kiwibank Limited 2.07% 2.12% -5 PROFIT INTEREST INTEREST EXPENSES ASSET EXPENSE PROFIT Kookmin Bank Auckland Branch 1.24% 1.66% -42 are rising. AFTERTAX INCOME INCOME EXPENSES AFTERTAX Rabobank Nederland New Zealand Banking Group 2.30% 2.62% -32 The decrease in profitability is largely attributable to a $350.20 million focus on providing exceptional in operating expenses (excluding Southland Building Society 2.72% 2.91% -19 reduction in non-interest income customer experience, citing an amortisation), offset by a $22 million The Bank of Tokyo-Mitsubishi UFJ Limited, Auckland Branch 0.37% 0.47% -10 and an increase of $223.42 million increase in sales made through digital increase in net interest income and a The Co-operative Bank Limited 2.71% 2.88% -17 in operating expenses (including channels as an example of this. These reduction of impaired asset expense The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch 1.85% 1.82% 3 sales have more than doubled over the and tax expense of $8 million and amortisation), which was offset by TSB Bank Limited 2.09% 2.19% -10 past two years as a result of improving $54 million, respectively. Although modest growth in net interest income Westpac Banking Corporation – New Zealand Division 2.12% 2.29% -17 of $127.41 million. mobile and digital experiences. Westpac did see a decrease of $43 million in NPAT, this was mainly Sector Average 2.15% 2.28% -13 The 11.19% reduction in non-interest due to a $26 million increase in n/a = not available income, as a result of a decline in impairment charges and an increase trading income and unfavourable Operating expenses increased by in operating expenses (including fair value/hedging movements over $223.42 which also had a noticeable amortisation) of $10 million. A summary of the financial It is noted that certain prior year Margins continue to contract financial instruments, had the largest impact on profitably. An increase performance of the survey participants figures reported by some survey impact on profitability. This income Of the non-major banks, TSB Bank The banking sector saw net interest in amortisation of goodwill and had the largest NPAT increase was as follows: participants have been restated in the statement line is volatile, and with margins (NIM) fall by 13 bps, from other intangibles accounted for of $36.05 million (141.26%). TSB current year’s financial statements. the exception of CBA, the other four —— net interest income grew by a 2.28% to 2.15% in 2016, despite $60.81 million of the growth in attributed its strong financial Unless otherwise stated within the major banks (ANZ, BNZ, Kiwibank and further $127.41 million (or 1.36%), an increase in net interest income operating expenses. performance this year to the growth commentary, all prior year figures Westpac) saw a $520 million decrease to reach $9.49 billion; of 1.36% ($127.41 million) for the strategy of the bank supporting the utilised for the purpose of our analysis year (see Table 4). The decline in in non-interest income. Between the major banks, ANZ and —— non-interest income saw a launch of a new suite of transactional, and calculation of ratios correspond NIM for the banking sector was the BNZ stood out with decreases in reduction of $350.20 million or On a more positive note, 10 out savings and investment products to the original prior year balances result of a prevailing low interest NPAT of $229 million (12.93%) and 11.19%, declining to $2.78 billion; of 21 survey participants reported to align their product offerings reported in the prior year financial rate environment and strong levels $125 million (12.04%), respectively. improved profitability for the year, with perceived customer needs.25 —— operating expenses (including statements of the survey participants of competition, which continue to ANZ’s reduction of NPAT can be which contributed an additional A reduction of impairment expenses amortisation) were up affected. Had the restated prior year put downward pressure on lending attributed to a $325 million decline $134.03 million to this year’s NPAT. also had an impact on the positive $223.42 million (4.56%), balances reported in the current year’s margins. Out of the 19 survey in non-interest income coupled with Among these 10 survey participants, results, which saw TSB reporting a to $5.12 billion; financial statements been utilised in participants, 16 reported a decline a $71 million increase in impaired CBA was the only major bank that saw credit impairment gain of $8.72 million this survey, some of the calculations in NIMs for the year, and a further asset expense, against net interest —— impaired asset expense higher NPAT levels for this year with in the current year, including a of ratios and movements would have two entities – Bank of China and income growth of $149 million and deteriorated by $21.59 million 4.25% ($37 million) NPAT growth to $13.71 million write-back of a Solid differed from the ones reported in China Construction Bank – did not a $105 million reduction in taxes. (or 4.93%); and $908 million. CBA noted in its press Energy provision as the result of a this analysis. See footnotes 37 to have comparatives. Similarly, BNZ’s $125 million decrease release,24 that the positive results revaluation of this debt. —— tax expense was down by 42 for more information about the in NPAT is mainly the result of a were a product of sustained growth in $133.42 million (6.75%), entities affected. $185 million decrease in non-interest key market segments and a continued to $1.84 billion. income and a $26 million growth

Despite lower interest income, the Volatility in global markets, together included in TSB Bank’s financials, TABLE 5: REGISTERED BANKS – DERIVATIVE CONTRACTS reduction in interest expense of with changes to a valuation as it has since been transferred to Interest rate contracts Exchange rate contracts 10.55% has positively impacted net methodology of financial instruments, a new group structure under the Entity Year Forwards Swaps Futures Options Total Forwards Swaps Options Total interest income levels, which have had a significant impact on the non- TSB Community Trust. Excluding the increased by 1.36% to $9.49 billion. interest income for ANZ as it reported income effect from ’investment in 2016 41,507 1,170,478 78,988 3,969 1,294,942 63,473 144,501 4,627 212,601 a decrease of $325 million (28.09%). associate’, non-interest income for ANZ Margins will continue to be under 2015 24,633 1,130,414 45,407 2,045 1,202,499 75,930 130,093 3,690 209,713 The reduction in non-interest income TSB increased from $15.45 million pressure in this low-interest rate by ANZ was primarily resulting 2016 14,351 395,083 224,541 322 634,297 64,487 49,047 6,004 119,538 to $16.01 million. BNZ environment as lending continues from a $250 million decrease in 2015 3,560 442,045 242,715 183 688,503 81,395 47,818 6,456 135,669 to grow. Additional downward net trading gains and a $102 million Funding mix 2016 4,850 46,388 2,828 499 54,565 6,797 0 243 7,040 margin pressures will be felt from decrease in income from hedging CBA + ASB Funding costs (interest expense/ 2015 14,477 33,574 1,250 82 49,383 7,365 2,713 315 10,393 increases in wholesale funding instruments. ANZ noted in its costs and competition for deposits average interest bearing liabilities) 2016 1,400 35,281 325 0 37,006 945 41 34 1,020 press release that changes to the Kiwibank (see the Funding mix section for methodology for credit valuation for the banking sector faced a 2015 1,800 37,506 1,075 0 40,381 978 36 37 1,051 further analysis). Banks, borrowers adjustments (CVA) in determining contraction of 62 bps, decreasing from 2016 1,225 257,354 15,273 1,181 275,033 17,295 51,204 0 68,499 and depositors alike will face some the fair value of derivatives, in order 3.87% to 3.25%. Of the 21 banks, Westpac 12 reported a decrease in funding 2015 112 350,798 8,821 215 359,946 27,540 46,538 0 74,078 interesting times as we move into to align itself with evolving market costs. The decrease in funding 2016 61,933 1,869,303 321,630 5,971 2,295,843 152,052 244,752 10,874 408,698 2017, with there being little likelihood practice, has negatively impacted its Total of any OCR cuts being passed on, and results this year.28 BNZ’s financials costs for the banking sector is the 2015 44,582 1,994,337 299,268 2,525 2,340,712 193,208 227,198 10,498 430,904 further pressure on funding availability told a similar story, reporting a result of a 10.55% ($1.48 billion) and rates. Banks are already warning weaker market performance which reduction in interest expense, despite an increase in interest-bearing of increasing interest rates for 2017. resulted in a reduction of $185 million This year, Deutsche Bank had the The largest increase in net interest The proportion of floating to fixed rate (26.54%) in its non-interest income, liabilities of $24.27 billion (6.46%) to largest NIM drop of 468 bps to income came from ANZ, which was loans has continued to decrease in driven by a $90 million decrease $399.82 billion. -3.03%, followed by Bank of India the result of a $796 million (17.54%) the past year by an additional 167 bps, Decrease in non-interest in trading income from interest and Kookmin Bank with reductions reduction in interest expense offset to 22.76% as at November 2016.26 income impacted by rate derivatives, additional losses of 54 bps and 42 bps, respectively. against a $647 million (8.72%) market volatility from hedge accounting and trading The decrease in NIM for Deutsche decrease in interest income. NIMs for Unfavourable valuation adjustments derivatives that were $47 million While the results of these figures Bank can be associated with the the major banks remain clustered in and lower treasury earnings have higher, and a $92 million loss from fair may initially seem to contradict recent winding up of its operations in the range of 2.07% to 2.22%. negatively impacted profitability for value movements. remarks made by the Executives about New Zealand which led to a $96 million Heartland Bank continues to have the the banking sector, contributing to a rising funding costs, it is important decrease in net interest income, strongest NIM at 4.79% due to the $350.20 million (11.19%) reduction to point out that these figures do resulting in a total net interest income There is a clear preference for one niche market in which they operate, in non-interest income. not necessarily reflect the current loss of $63 million. and two-year fixed rate loans, as they situation within the funding market particularly in the areas of reverse Of the 21 survey participants, nine In relation to the other banks, comprise almost two-thirds of total due to the disparity of the survey All of the five major banks also saw mortgages, asset financing and 27 reported lower non-interest income Rabobank had the largest reduction mortgage lending (66.79%). As a participants’ year-end balance dates. reductions to their NIMs for the year, working capital markets. result, the increase in interest-earning for this year when compared to in non-interest income of 45.84% with Westpac seeing the largest This is particularly true for disclosure However, it is important to point out assets of 6.85% did not translate into our previous survey, with three ($16.56 million) when compared to decrease of 17 bps, followed by statements of non-major banks that that the NIM of 4.79% includes a 2015 higher interest income as interest participants reporting a net loss from the rest of the survey participants, CBA, BNZ, ANZ and Kiwibank, with have a year-end date that falls between pre-amalgamated interest earning income decreased by 5.79% to a total non-interest income activities. The derived from higher hedge accounting decreases in the range of 16 bps 31 December 2015 and 30 June 2016, assets figures within the calculation. of $22.07 billion. decrease in non-interest income was losses which were $29.5 million more to 4 bps. This range, however, is when funding costs were lower than Using 2015 restated amalgamated primarily driven by the major banks, than last year, resulting in a net loss reduced to 12 bps to 4 bps if restated they are now. Comments made by figures, Heartland Bank would have with four of them contributing a of $52.69 million for non-interest prior year figures were used for Executives in relation to rising interest achieved normalised NIM of 4.41%, decrease in non-interest income of income. This was due to a change in BNZ and CBA. Using restated 2015 costs relate more to the second half which is still the strongest in the The five major banks saw a decrease $520 million. CBA was the exception, the measurement of hedging items comparatives, CBA’s NIM had only of 2016, and into 2017. banking sector. in interest income that amounted delivering an additional $76 million for Rabobank for the financial year for contracted by 12 bps, decreasing to $1.46 billion. The most significant (this reduces to $47 million if restated 2016. Using restated the financial year It is noted that the decrease in funding from 2.26% (prior year restated NIM) The yield on lending continued to decreases came from ANZ and BNZ, 2015 comparatives are used). CBA’s comparatives for 2015 would have costs was primarily driven by the major to 2.14% in the current year. Despite tighten due to the intense competition with a decline of $647 million and growth in non-interest income is meant that Rabobank had a larger banks that saw decreases in the range declining NIMs, four major banks had in lending assets, particularly in the $393 million, respectively. Surprisingly, largely attributed to a $15 million decrease in non-interest income of of 50 bps to 90 bps. Citibank and The a combined increase of $210 million area of residential mortgages, in 12 of the 21 banks surveyed reported reduction in losses from hedging $18.54 million (54.30%). TSB Bank’s Bank of Tokyo-Mitsubishi were the in net interest income, with Westpac addition to customers’ preferences for positive growth in interest income of instruments, a $11 million increase in reduction in non-interest income of only other participants that disclosed being the exception with a decrease of lower margin fixed rate loans at a time $146.68 million collectively. This was, funds management income, and an 24.14% ($5.09 million) was due to lower interest expense levels, with $7 million. when it is perceived that interest rates however, undone by the significant additional $16 million increase in other income from ’investment in associate decreases of $3.44 million and are at a low point in the cycle. reductions from the major banks. operating income. – held for sale‘ being no longer $18.38 million, respectively.

The decrease in funding (as a However, given the small size of With $6.47 billion in additional lending, The composition of lending exposures The focus for lending growth will be The big four banks had a combined percentage) for the major banks was the domestic funding market, it is CBA had the largest dollar increase in remains largely unchanged from on deals that provide an appropriate increase of $179 million (representing the result of the combined effect of expected that a large proportion of gross loans and advances, which were last year, with mortgage exposures return. In addition, lower lending 89.94% of the banking sector’s total lower interest expense levels and the funds required will be raised from attributable to strong lending growth being the single most dominant growth is to be expected in the increase) in collective provisioning to larger interest-bearing liabilities. It is offshore markets. With increased across all key portfolios, including component of the banking sector’s near future, due to increased LVR allow for additional risk in a growing noted that the increase in interest volatility in the global financial market business, commercial, rural, personal loan book. According to RBNZ data, restrictions by the RBNZ, restrictions lending book and the dairy downturn bearing liabilities among four of the for the foreseeable future, further and home lending. mortgage lending represents 53.05% of lending activities involving foreign in the first half of the year. major banks was substantially driven increases in funding costs can also or $227.74 billion of total lending in borrowers and the voluntary exclusion Loan growth between the big four In spite of a growing loan book, by higher levels of customer deposits be expected. One of the questions the sector. of overseas income when performing banks appears to be equitably gross impaired assets and past due and other borrowings. raised with Executives was whether debt servicing calculations by the distributed, as ANZ, BNZ and assets have fallen significantly by the decrease in deposits experienced major banks and some others. There The November 2016 RBNZ Financial Westpac achieved lending growth 16.73% ($294.10 million) and 23.38% by some banks was the beginning of will also be an increased emphasis on Stability Report highlighted that since of $6.28 billion, $6.24 billion and ($159.73 million), to $1.46 billion and a structural change or more of a blip. deals that provide good margins at risk 2015, credit growth has increased, but $6.03 billion, respectively. BNZ’s Based on the most recent RBNZ data, $523.37 million, respectively. With this, Some Executives speculated that it levels that are appropriate, particularly household deposit growth has slowed, re‑entry to the broker market meant dairy lending by the banking sector the ratio of past due assets to gross was the beginning of a move away as the banks’ funding tightens. which has caused the gap between that they had an additional $1.8 billion continues to grow, but at a slower loans and advances have dropped from from deposits, caused in part by a credit and household deposit growth in home loans written through brokers pace of 6.18% ($2.33 billion) for the 0.19% to 0.14%. Similarly, the ratio of greater flow of money into KiwiSaver levels to widen. In an attempt to close this year.31 year ended 30 June 2016, compared Asset quality remains strong gross impaired assets to average gross and other investments, which was the gap between credit and household to last year’s growth of 9.25% Asset quality indicators show that total loans and advances has improved by caused partly by the low deposit rates deposit growth, banks have begun to ($3.20 billion). provision (i.e. collective and specific 12 bps to 0.38%. and partly by consumer preference in provision), as a percentage of average increase lending and deposit rates, Despite the dairy downturn earlier the younger demographic. gross loans and advances, is currently which have resulted in higher deposit With the exception of Bank of in the year, growth in dairy lending sitting at 0.55%, a 3 bps improvement rates towards the end of 2016. China (due to an absence of prior remains largely in-line with total Lending asset continues to from the previous year. gain momentum year comparatives), the Chinese lending growth in the agricultural However, the impaired asset banks had the largest percentage sector as the proportion of dairy expense for the year rose by 4.93% Over the past year, total assets for increases in loan growth as they lending to total agricultural lending ($21.59 million) to $459.60 million. the banking sector have increased by The report also notes that the increase continued to establish their foothold remains consistent at 66.77% The increase in impairment expense $32.85 billion (or 7.03%), reaching a in funding costs, which has been in the New Zealand market. China (66.69% in 2015). The overall improvement in asset is in line with an 8.10% growth in total of $500.32 billion for the sector. passed on to borrowers through Construction Bank and ICBC saw quality for the banking sector is total gross loans. The impaired asset With lending growth for the year at higher lending rates, may dampen loan book growth of 7,919.15% attributable to specific provisioning expense over the average gross $29.66 billion (or 8.10%), this was credit growth and, therefore, narrow ($303.15 million) and 342.27% levels decreasing by 36.11% to loans ratio for the banking sector observed to be the fastest pace in $441.55 million, partially offset by the gap between deposit and credit ($294.96 million), respectively. Across the board, the majority of the has remained unchanged from the growth. However, if the gap between growth during the last eight years and increases to collective provisioning Of the 21 survey participants, only banks have enjoyed strong lending previous year at 0.12%. credit and household deposit growth it took total loans to $395.71 billion. that have only marginally increased three banks reported decreases in growth this past year despite the continues to persist, banks will be by 13.84% or $199.01 million. The gross loans and advances this year, threat of increasing competition from required to increase market funding, Bank of Tokyo-Mitsubishi recorded the including Deutsche Bank, Kookmin new market entrants and non-bank adding to the estimated $40 billion largest decline in specific provisions as Bank and HSBC. lenders. Going into 2017, lending ANZ saw the greatest individual of market funding to be rolled over Strong lending growth was made a direct result of the disposal of all its growth will be challenged due to increase in impaired asset expense in the medium term (according the possible by a rising housing market In terms of gross loans and advances, impaired loans, with specific provisions pressures on the funding side of the of 93.42% to $147 million, through November 2016 RBNZ Financial as the total value of New Zealand’s ANZ continues to dominate the declining from $63.70 million to nil. balance sheet. This means that the new and increased provisions and a Stability Report).29 housing stocks climbed to a value of lending space with a market share of Rabobank and HSBC had the next funding gap between local deposits reduction in write backs. The result just over $1 trillion for the year ended 30.65%, down by 77 bps from 31.42% largest improvement towards specific raised and loans lent will have to be for ANZ is attributable to the ongoing 30 September 2016, an increase of last year. Westpac’s market share provisioning levels, with decreases filled by funding from overseas sources, normalisation of provision levels in 16.17% during the year.30 of $49.28 million and $19.86 million, remained fairly stable with an increase which is typically more expensive. respectively. Despite the dairy sector their portfolios, combined with lower Competition within the local deposit of 9 bps to 19.21%, while BNZ and downturn, Rabobank achieved strong levels of write-backs and recoveries market will continue to intensify as CBA saw the largest increases of the loan provision recoveries which than have been experienced in banks look to strengthen their funding major banks of 17 bps and 22 bps, outweighed new provisions taken previous years. CBA and Westpac mix and source their funding from more All five major banks reported to 18.93% and 19.16%, respectively. during the year, resulting in a decrease were similar, with an increase of stable sources, such as household increases to their loan books in in provisioning for the current year. $28 million to $129 million, and deposits and long-term market funding. the range of 5.46% and 9.33%. $26 million to $73 million, respectively. In total, the major banks account for over 88.01% of the $29.66 billion in new lending for the year.

Higher operating expenses (excluding When looking at the ROA performance TABLE 6: MAJOR BANKS – PERSONNEL COST Return on equity/Return amortisation) were seen across all the on assets for the banking sector, we noted Entity 2016 2015 major banks, ranging from 0.41% to a similar story where only seven The banking sector is experiencing 5.30%. Of the major banks, Kiwibank participants ended the year with higher Cost/ Cost/ increasing difficulty in maintaining the Personnel Personnel reported the greatest percentage ROA levels. This is largely attributable Employee average Employee average current level of returns in the present cost cost increase of 5.30% as a result of to higher NPAT levels that were able numbers employees numbers employees market environment, as decreasing $Million $Million significant investments in banking to increase at a faster rate than asset $000's $000's margins, higher operating expenses infrastructure and services in the growth. Where banks reported lower and rising bad debts continue to put ANZ 7,655 894 116 8,104 874 108 integration of its new core IT operating ROA ratios for the year, this was downward pressure on the return system. Kiwibank noted in its press generally the result of a reduction to BNZ 5,019 476 97 4,841 449 93 on average equity (ROE) level. These release that there have also been their NPAT. CBA + ASB 4,770 502 107 4,469 487 109 challenges have resulted in the ROE major changes to its retail network level for the sector declining by Going forward, Executives have Kiwibank 1,410 122 94 1,188 123 104 with branch upgrades and the opening 200 bps, from 15.96% to 13.96%. commented that a big emphasis will Westpac 4,267 465 106 4,497 468 104 of the first stand-alone Kiwibank Only nine survey participants reported be placed on improving and monitoring branch in central Hamilton.32 improvements in ROE levels, ranging these levels of returns rather than just from 12 bps to 2,421 bps. CBA is the focusing on loan book growth. As a The increase in impaired asset Of the 21 survey participants, 13 saw Deterioration of the only major bank that showed higher result of continuing pressures coming expense for CBA and Westpac was higher operating expense/operating operating expense ratio due ROE levels this year, with a 100 bps from competition, higher costs of due to movements in collective income ratios. Among the major to lower operating income In terms of dollar value, Westpac increase on ROE levels of 15.79% funds and global volatility (affecting provisioning. On the other hand, banks, BNZ registered the largest and higher costs reported the greatest increase in from the previous year. The banking non-interest income), it is likely that BNZ and Kiwibank managed to reduce increase in its operating expense operating expenses (excluding sector’s performance of its return on ROA and ROE will continue to be their impaired asset expense by The focus on innovation initiatives ratio, with an increase of 357 bps. amortisation) of $41 million as a result average total tangible assets (ROA) under pressure from these areas. 6.25% to $120 million and 15.38% and investment in new technologies, Higher operating costs for BNZ were of increased investment in service ratio was also impacted negatively, to $11 million, respectively. increased costs from regulatory due to the continued investment in transformation as part of a new as ROA levels for the sector as whole compliance programmes, and their key segments such as digital, Capital adequacy ratio TSB saw their impaired asset expense personnel costs continue to be service strategy in place to enhance fell from 1.16% to 1.00%. The results small medium enterprises (SMEs), 33 When looking at the banking levels change from a $56.05 million customer service. reported so far, help us to understand significant factors driving the higher brokers and the Auckland housing sector, only 15 survey participants charge in the previous year to an the recent focus on maintaining/ operating expense to income ratios. market. On the other hand, CBA (subsidiaries/locally incorporated $8.72 million recovery in the current building current capital levels. Operating expenses (excluding reported an 88 bps improvement to banks) have disclosed their risk year; however, this movement was not amortisation) relative to operating its operating expense ratio, decreasing weighted asset exposures, and as reflected within its specific/collective income (i.e. operating expense ratio) from 36.56% to 35.68%, as a result Bank of Baroda and The Bank of such, we are unable to comment on provisioning balance as it was directly increased from 37.32% to 39.39%, of disciplined cost management and Tokyo-Mitsubishi were the only the capital adequacy position of the netted against its ’Investment an increase of 207 bps in the last year. efficiency improvements despite the two banks who enjoyed a decrease The decline in ROE and ROA levels is survey participants as a whole. securities‘ balance. The impaired asset in operating expenses (excluding The increase was caused by the continued investments in technology largely the result of NPAT declining by recovery includes a $13.71 million amortisation) compared to last year, This year it was noted that 11 survey combined effect of lower operating and specialist frontline capabilities. 6.46% ($334.38 million), while total write back of a Solid Energy provision. with a reduction of 5.26% ($167k) participants have had a decrease in their income levels and higher operating equity and total tangible assets have and 0.69% ($30k), respectively. Bank total capital and tier 1 capital ratios. There is a general consensus that expenses (excluding amortisation). grown by 5.04% ($1.71 billion) and of Baroda’s reduction was attributed However, despite that, their ratios still while asset quality remains strong, Operating income for the banking 7.03% ($32.85 billion), respectively. to a decrease in employee benefits remain well above regulatory minimum caution will need to be taken due to sector fell by 1.78% ($222.16 million) It is worth noting that the big four and other operating expenses CBA’s 100 bps increase in ROE is requirements. As the Chinese and key areas of risk, stemming from dairy, to $12.26 billion, and this could be banks continued to have one of the (excluding amortisation), while The attributable to a 4.25% ($37 million) Indian banks have recently entered into property and global uncertainties, all of attributed to a $350.20 million decline lowest operating ratios in the industry, Bank of Tokyo-Mitsubishi’s decrease increase in NPAT, despite its the sector, it will take some time for which will have a significant impact on in non-interest income for the year. ranging from 35.68% to 38.44%. The was achieved through a decrease total equity growing by 3.33% them to build leverage as they grow the local economy. On the other hand, operating expenses Bank of Tokyo-Mitsubishi is the only in general administration costs and ($177 million). ANZ, BNZ, Kiwibank their loan books and increase their (excluding amortisation) grew by other bank that had a better operating other expenses. and Westpac all saw reductions to funding bases (i.e. liabilities). 3.66% ($170.61 million), to reach total ratio of 12.59%. As The Bank of their ROE in the range of 100 bps operating expenditures (excluding Tokyo-Mitsubishi primarily caters to Investment in technology and to 324 bps. For example, as a result of having a amortisation) of $4.83 billion. An corporate customers, the average size digital capabilities in a fast-changing lower leverage position, the Chinese additional $87.32 million in personnel of its loans are typically much larger technological environment will remain banks started the year with capital costs recognised this year would in nature, allowing the bank to receive a critical area of investment for survey ratios of 424.78%, 133.43%, 36.33%. account for nearly half of the increase more in the way of interest income participants in order to improve During the year these have declined in in operating costs (see Table 6). while sustaining a smaller workforce customers experience and counteract the range of 2,364 bps to 38,891 bps, and footprint. the threat of market disruptors. to conclude the year at 34.87%, 14.00% and 12.69%, respectively.

As at 1 July 2016, Kiwibank no longer TABLE 7: MAJOR BANKS – FUNDS MANAGEMENT ACTIVITIES operates a KiwiSaver fund balance 2015–2016 as it has transferred all of its assets 2016 2015 Entity Movement and members to the ’Kiwi Wealth $Million $Million % KiwiSaver Scheme‘, managed by Kiwi Wealth Limited (not a subsidiary ANZ 26,485 16.47% 22,740 of Kiwibank). BNZ 4,722 21.08% 3,900 Continuing a similar trend to last CBA + ASB 8,917 18.53% 7,523 year, the big four banks reported Kiwibank 3,525 -5.62% 3,735 double digit-growth, with BNZ and Westpac 10,766 13.95% 9,448 CBA reporting the largest growth of 21.08% ($822 million) and 18.53% Total 54,415 14.93% 47,346 ($1.39 billion), respectively. BNZ’s strong growth came on the back of Apart from the Chinese banks, Bank Over the past year, we have seen an $872 million increase in portfolios of Baroda and Bank of India (other a significant amount of funds managed on behalf of its customers. recent registrations) saw significant entering the banking sector through FUM growth for CBA came from reductions in their total capital ratio of the use of capital raising efforts. wholly-owned subsidiaries, such as 1,780 bps (to 94.20%) and 1,100 bps Most notably, ANZ and ASB had ASB Group Investments Limited, (to 70.00%), respectively. Despite the seek to raise over $200 million and an investment administration and decrease, Bank of Baroda and Bank $400 million in additional funds management company. of India continue to have the highest through debt issuances, respectively. ANZ remains the biggest provider in total capital adequacy ratio. Between The Co-operative Bank raised up to the FUM sector, with a $3.75 billion the major banks, BNZ, Kiwibank and $45 million in subordinated notes (16.47%) growth in FUM to Westpac had decreases of 63 bps from the two capital raise held this $26.49 billion. The growth in FUM is (to 12.04%), 50 bps (to 12.90%), and year, and with Heartland Bank most attributable to increases across the 20 bps (to 13.10%), respectively. On recently completing a $20 million board, but an increase relating to the other hand, ANZ and CBA showed capital placement last December KiwiSaver and other managed funds improvements of 100 bps (14.30%) and with another $10 million contributed an additional $2.07 billion, and 160 bps (to 14.30%), respectively. currently underworks. while growth from investment The tier 1 capital ratios follow a similar portfolios managed on behalf of trend, with 11 survey participants Funds under management customers amounted to $987 million. having had a decrease in their Despite unwanted media attention Westpac also reported commendable respective tier 1 capital ratios. over its KiwiSaver schemes earlier in growth of 13.95% growth the year in relation to the nature of ($1.32 billion) to FUM. Much of the Despite all this, New Zealand banks certain investments held, the funds are still well capitalised. RBNZ data as increase came primarily from an management businesses of the banks $828 million increase in retirement at 30 September 2016 shows that the have seen strong growth in their funds locally incorporated banks’ common plan funds, along with moderate under management (FUM) operations. increase of $235 million and equity tier 1 (CET 1) capital ratio was FUM levels have increased by a further 10.4% and the tier 1 capital ratio was $148 million in PIE funds and retail unit 14.93% ($7.07 billion), reaching a year- trusts, respectively. 11.9 %, well above the minimum end FUM balance of $54.42 billion (see requirements of 4.5% for CET 1 and Table 7). 6% for tier 1.34 Kiwibank again reported another reduction of $210 million (5.62%) in FUM, on top of a $150 million decrease from the previous year. Current FUM of $3.53 billion relates to funds held by a subsidiary, which operates Kiwibank PIE Unit Trusts, and is solely invested in term and call deposit investments with Kiwibank.

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 30-Sep-2016 2016 1 163,358 7,819 14.30 11.80 121,129 89,768 7,655 215 666 -12.93 -10.19 7.35 Wellington Limited – New Zealand Banking Group36 30-Sep-2015 2015 1 152,177 7,507 13.30 11.30 114,843 83,134 7,724 225 684 3.51 8.62 12.58 31-Mar-2016 2016 21 92 45 94.20 94.20 64 44 19 3 3 68.89 94.96 18.56 Bank of Baroda (New Zealand) Limited Auckland 31-Mar-2015 2015 20 77 44 112.00 112.00 49 32 20 3 3 -34.60 -20.93 10.94 31-Dec-2015 2016 19 208 56 34.87 34.87 145 35 n/a n/a n/a -655.08 -755.08 205.76 Bank of China (New Zealand) Limited Auckland 31-Dec-2014 2015 21 68 62 424.78 424.78 0 0 n/a n/a n/a 0.00 0.00 0.00 31-Mar-2016 2016 20 101 52 70.00 70.00 74 19 12 3 0 20.06 20.00 18.23 Bank of India (New Zealand) Limited Auckland 31-Mar-2015 2015 19 86 52 81.00 81.00 62 12 11 3 0 32.62 31.06 24.12 30-Sep-2016 2016 3 92,325 6,789 12.04 10.05 74,823 51,481 5,019 171 479 -12.04 -12.20 6.58 Bank of New Zealand37 Auckland 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 China Construction Bank (New Zealand) 31-Dec-2015 2016 18 402 53 14.00 14.00 307 97 32 n/a n/a -571.00 -572.97 335.24 Auckland Limited 31-Dec-2014 2015 18 92 58 133.43 133.43 4 1 17 n/a n/a 0.00 0.00 0.00 31-Dec-2015 2016 14 1,974 195 15.44 14.17 755 1,064 29 1 0 -5.44 -3.91 -0.30 Citibank, N.A. New Zealand Branch38 Auckland 31-Dec-2014 2015 13 1,980 196 14.81 13.65 572 923 27 1 0 53.58 45.69 -9.61 Commonwealth Bank of Australia 30-Jun-2016 2016 4 85,804 5,174 14.30 12.30 75,757 50,892 4,770 134 431 4.25 4.57 6.90 Auckland New Zealand Banking Group39 30-Jun-2015 2015 4 80,262 4,997 12.70 11.20 69,288 49,138 4,630 134 462 3.08 0.73 11. 18 31-Dec-2015 2016 11 3,184 121 15.40 12.30 248 150 0 0 0 -75.00 -66.67 49.34 Deutsche Bank AG, New Zealand Group Auckland 31-Dec-2014 2015 12 2,132 152 16.00 12.90 273 83 29 0 0 500.00 650.00 -17.20 30-Jun-2015 2016 9 3,502 453 13.78 13.79 3,130 2,283 363 7 0 32.25 32.35 26.05 Heartland Bank Limited40 Auckland 30-Jun-2014 2015 11 2,778 353 12.86 12.79 2,323 2,085 352 7 0 12.99 17.84 17.20 Industrial and Commercial Bank of China 31-Dec-2015 2016 16 742 54 12.69 12.69 381 127 37 1 n/a 0.64 -0.82 10.63 Auckland (New Zealand) Limited 31-Dec-2014 2015 16 670 57 36.33 36.33 86 9 23 1 n/a -4,777.05 -4,701.64 999.21 JPMorgan Chase Bank, N.A. New Zealand 31-Dec-2015 2016 15 883 0 14.12 13.54 93 193 11 0 0 -37.50 -34.65 -13.04 Wellington Branch 31-Dec-2014 2015 15 1,016 0 12.53 11.82 47 169 13 0 0 400.09 403.37 4.83 30-Jun-2016 2016 5 19,357 1,129 12.90 10.70 16,733 14,743 1,410 258 241 -2.36 -4.08 5.52 Kiwibank Limited Wellington 30-Jun-2015 2015 5 18,344 1,033 13.40 11. 0 0 15,639 13,724 1,188 265 243 27.00 24.05 10.00 31-Dec-2015 2016 17 450 3 16.01 13.74 122 207 13 1 0 -24.36 -24.78 20.19 Kookmin Bank Auckland Branch Auckland 31-Dec-2014 2015 17 374 4 15.97 13.38 126 151 14 1 0 -25.27 -23.74 -10.60 Rabobank Nederland New Zealand Banking 31-Dec-2015 2016 6 14,485 1,480 23.20 16.40 10,642 4,767 319 33 0 -24.77 -23.87 6.86 Wellington Group41 31-Dec-2014 2015 6 13,555 1,340 21.30 16.00 10,001 4,696 305 32 0 -14.45 -12.64 11. 18 31-Mar-2016 2016 10 3,408 235 13.76 12.50 2,889 2,703 447 16 0 2.76 0.32 19.13 Southland Building Society Invercargill 31-Mar-2015 2015 10 2,860 241 15.61 13.85 2,407 2,436 428 17 0 24.29 25.64 2.64 The Bank of Tokyo-Mitsubishi UFJ Limited, 31-Mar-2016 2016 12 3,169 125 15.66 12.71 2,818 484 17 1 0 5,398.68 777.25 4.96 Auckland Auckland Branch 31-Mar-2015 2015 9 3,019 98 15.61 12.33 2,625 201 17 1 0 96.93 82.44 -12.50 31-Mar-2016 2016 13 2,041 157 15.80 15.70 1,807 1,788 311 34 0 15.52 20.83 13.01 The Co-operative Bank Limited Wellington 31-Mar-2015 2015 14 1,806 150 16.50 16.40 1,565 1,575 305 34 0 24.41 26.97 11.24 The Hongkong and Shanghai Banking 31-Dec-2015 2016 8 5,575 39 18.60 16.60 3,589 3,252 217 1 0 27.36 26.80 5.35 Auckland Corporation Limited, New Zealand Branch 31-Dec-2014 2015 8 5,292 28 15.70 14.40 3,780 3,181 213 1 0 165.11 156.73 5.08 New 31-Mar-2016 2016 7 6,427 554 14.52 14.52 3,848 5,813 388 27 45 141.26 152.81 8.71 TSB Bank Limited42 Plymouth 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 Westpac Banking Corporation – New Zealand 30-Sep-2016 2016 2 92,833 6,512 13.10 11.20 75,912 57,541 4,267 189 620 -4.27 -5.15 5.09 Auckland Division 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 2016 500,320 31,046 n/a n/a 395,268 287,453 25,336 1,095 2,485 -6.46 -0.06 0.07 Bank Sector Total 2015 467,467 29,421 n/a n/a 365,444 265,561 24,982 1,114 2,552 0.07 0.10 0.10 * Total Assets = Total Assets - Goodwill - Other Intangibles n/a = not available

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 2016 147 152 433 35.57 0.39 0.52 0.12 3,861 1.92 2.22 1.85 0.53 1,542 14.00 0.98 2,230 1.41 0.94 38.44 Limited – New Zealand Banking Group36 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 2016 0 0 0 100.00 0.41 0.58 0.11 4 3.35 3.48 1.32 1.89 1 3.14 1.65 1 1.60 3.56 67.91 Bank of Baroda (New Zealand) Limited 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 2016 0 0 0 0.00 0.30 0.30 0.60 3 2.18 2.21 1.87 -0.36 -6 -10.38 -4.46 -7 -5.05 6.55 361.27 Bank of China (New Zealand) Limited 2015 0 0 0 0.00 0.00 0.00 0.00 1 0.00 0.00 0.00 0.00 -1 0.00 0.00 -1 0.00 0.00 236.17 2016 0 0 0 0.00 0.41 0.41 0.07 4 3.60 3.67 1. 18 0.52 1 1.43 0.79 1 1. 11 2.96 71.78 Bank of India (New Zealand) Limited 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 2016 120 173 253 39.53 0.59 0.73 0.17 2,269 1.96 2.19 1.79 0.57 913 13.00 1.02 1,303 1.46 0.95 37.29 Bank of New Zealand37 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 China Construction Bank (New Zealand) 2016 0 0 0 0.00 0.10 0.10 0.20 3 1.46 1.48 1.03 -0.19 -5 -8.54 -1.92 -5 -1.91 3.06 241.57 Limited 2015 0 0 0 0.00 0.08 0.08 0.00 1 0.00 0.00 0.00 0.00 -1 0.00 0.00 -1 0.00 0.00 149.33 2016 0 0 0 0.00 0.00 0.00 0.00 47 1.67 1.69 1.44 0.71 20 10.22 1. 01 28 1.41 0.98 40.91 Citibank, N.A. New Zealand Branch38 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 Commonwealth Bank of Australia 2016 129 77 430 13.02 0.35 0.42 0.18 2,228 2.07 2.14 1. 76 0.61 908 16.79 1.09 1,304 1.57 0.96 35.68 New Zealand Banking Group39 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 2016 0 0 0 0.00 0.00 0.00 0.00 44 -2.37 -3.03 -2.17 4.03 6 4.38 0.23 10 0.38 1.28 77.27 Deutsche Bank AG, New Zealand Group 2015 0 0 0 0.00 0.00 0.00 0.00 56 1.40 1.66 1. 76 0.98 24 1 7. 1 4 1.02 30 1.27 1. 10 46.43 2016 14 22 37 13.23 0.52 0.67 0.49 155 4.67 4.79 4.26 0.26 54 12.44 1.72 73 2.31 2.19 44.41 Heartland Bank Limited40 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 Industrial and Commercial Bank of China 2016 1 0 0 0.00 0.33 0.33 0.33 7 0.86 0.89 0.76 0.09 -3 -5.30 -0.42 -3 -0.42 1.26 132.47 (New Zealand) Limited 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 JPMorgan Chase Bank, N.A. New Zealand 2016 0 0 0 0.00 0.00 0.00 0.00 17 0.57 0.85 0.72 1.23 4 0.00 0.42 6 0.62 1. 18 65.62 Branch 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 0.91 1.03 53.25 2016 11 7 15 60.00 0.26 0.32 0.07 477 1.98 2.07 1.62 0.55 124 11.47 0.66 188 1. 0 0 1.47 58.28 Kiwibank Limited 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 2016 0 0 0 0.00 0.43 0.43 -0.03 7 1.24 1.24 1.23 0.52 3 80.08 0.70 4 0.98 0.78 44.35 Kookmin Bank Auckland Branch 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 Rabobank Nederland New Zealand 2016 -6 25 49 14.01 0.14 0.21 -0.06 266 2.27 2.30 1.96 -0.38 111 7.88 0.79 161 1. 14 0.79 41.92 Banking Group41 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 2016 13 3 9 30.35 0.57 0.66 0.50 114 2.68 2.72 2.40 0.97 20 8.26 0.64 28 0.90 2.33 63.70 Southland Building Society 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. 0 0 2.34 62.09 The Bank of Tokyo-Mitsubishi UFJ Limited, 2016 0 0 0 0.00 0.00 0.00 0.00 34 0.36 0.37 0.31 0.74 26 23.70 0.86 30 0.96 0.14 12.59 Auckland Branch 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 2016 1 6 2 30.27 0.18 0.21 0.08 71 2.68 2.71 2.22 1. 01 10 6.68 0.53 16 0.84 2.77 75.22 The Co-operative Bank Limited 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 Hongkong and Shanghai Banking 2016 -35 0 4 24.69 0.08 0.11 -0.95 146 1.75 1.85 1.70 0.94 85 172.20 1.56 119 2.20 1. 14 42.42 Corporation Limited, New Zealand Branch 2015 -18 0 122 1 7. 0 0 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 2016 -9 3 10 14.36 0.47 0.50 -0.24 144 2.07 2.09 1.63 0.26 62 11.70 1. 0 0 86 1.39 1.08 46.25 TSB Bank Limited42 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 Westpac Banking Corporation – 2016 73 56 222 47.30 0.43 0.57 0.10 2,362 1.96 2.12 1.64 0.65 963 14.56 1.06 1,400 1.55 0.98 37.64 New Zealand Division 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. 0 0 35.77 2016 460 523 1,464 30.16 0.41 0.53 0.12 12,263 1.96 2.15 1.76 0.57 4,839 13.96 1.00 6,973 1.44 1.00 39.39 Bank Sector Total 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 * Operating Expenses = Total Expenses - Interest Expense - Loan Write Offs and Bad Debts - Abnormal Expenses.

Balance sheet breakdown Assets ($Million) Liabilities ($Million) Equity ($Million)

Entity shares shares reserves reserves provisions) Intangibles Total equity Total Total assets Total instruments instruments instruments instruments Fixed assets Fixed Other assets Balance date Total liabilities Total Debt securities Debt securities Other liabilities Retained earnings Retained earnings Subordinated debt Subordinated Customer deposits Customer Derivative financial Derivative Derivative financial Derivative Head office account Head office Share capital – ordinary capital – ordinary Share Convertible debentures/ Convertible Loans and advances (less Loans and advances balances with other banks and investment properties and investment Balances with other banks investments in subsidiaries in subsidiaries investments Perpetual preference shares shares preference Perpetual and money market deposits market and money Balances with related parties parties Balances with related Balances with related parties parties Balances with related Other equity/Cash flow hedge hedge Other equity/Cash flow Trading, investment securities, securities, investment Trading, Cash on hand, money at call and money Cash on hand, 2016 Australia and New Zealand Banking Group Limited 30-Sep 4,527 14,957 16,634 120,651 4,903 387 3,424 1,223 166,706 89,768 2,053 29,207 17,096 13,614 2,336 1,465 155,539 8,044 11 0 62 3,050 11,167 – New Zealand Banking Group Bank of Baroda (New Zealand) Limited 31-Mar 22 0 0 64 3 0 0 1 92 44 0 0 0 2 0 0 47 40 0 0 0 5 45 Bank of China (New Zealand) Limited 31-Dec 61 0 0 145 0 1 0 1 208 35 25 0 1 88 0 3 152 63 0 0 0 -7 56 Bank of India (New Zealand) Limited 31-Mar 22 0 0 74 4 1 0 0 101 19 0 0 0 29 0 1 49 50 0 0 0 2 52 Bank of New Zealand 30-Sep 4,098 4,703 7,319 74,378 934 165 216 728 92,541 51,481 1,244 22,753 7,786 814 542 916 85,536 2,351 0 200 115 4,339 7,005 China Construction Bank (New Zealand) Limited 31-Dec 85 0 1 307 7 2 0 0 402 97 15 125 2 110 0 1 349 59 0 0 0 -5 53 Citibank, N.A. New Zealand Branch 31-Dec 524 0 0 755 117 1 0 578 1,974 1,064 23 0 0 684 0 7 1,779 29 34 0 0 133 195 Commonwealth Bank of Australia New Zealand 30-Jun 2,110 5,529 1,275 75,492 667 187 449 408 86,127 50,892 452 18,527 1,741 3,265 5,134 619 80,630 704 462 1,034 448 2,849 5,497 Banking Group Deutsche Bank AG, New Zealand Group 31-Dec 119 808 0 248 2,002 0 0 7 3,184 150 460 494 0 1,946 0 13 3,063 20 0 0 3 99 122 Heartland Bank Limited 30-Jun 84 236 0 3,114 0 9 58 46 3,547 2,283 0 717 6 0 0 43 3,049 421 0 0 -2 79 498 Industrial and Commercial Bank of China 31-Dec 353 5 1 380 0 1 0 2 742 127 0 85 9 461 0 5 687 60 0 0 -6 0 54 (New Zealand) Limited JPMorgan Chase Bank, N.A. New Zealand Branch 31-Dec 118 258 0 93 177 0 1 237 884 193 0 224 0 54 0 412 884 0 0 0 0 0 0 Kiwibank Limited 30-Jun 756 955 658 16,689 77 23 158 41 19,357 14,743 135 2,207 725 43 258 117 18,228 400 0 0 113 616 1,129 Kookmin Bank Auckland Branch 31-Dec 22 0 0 121 306 0 0 0 450 207 117 0 0 122 0 1 447 0 3 0 0 0 3 Rabobank Nederland New Zealand Banking Group 31-Dec 293 645 22 10,627 2,839 5 0 53 14,485 4,767 0 3,120 27 5,023 0 68 13,005 551 204 0 0 725 1,480 Southland Building Society 31-Mar 77 401 4 2,873 2 24 5 28 3,412 2,703 150 199 42 0 39 39 3,172 0 0 0 -13 253 240 The Bank of Tokyo-Mitsubishi UFJ Limited, 31-Mar 227 27 11 2,818 66 0 0 19 3,169 484 0 0 9 2,549 0 1 3,044 0 83 0 1 41 125 Auckland Branch The Co-operative Bank Limited 31-Mar 198 9 4 1,804 0 8 13 6 2,041 1,788 0 65 15 0 0 16 1,884 0 0 0 -5 162 157 The Hongkong and Shanghai Banking Corporation 31-Dec 353 447 208 3,586 961 1 16 18 5,591 3,252 186 844 105 1,106 0 44 5,537 0 54 0 1 0 54 Limited, New Zealand Branch TSB Bank Limited 31-Mar 118 2,449 0 3,830 0 19 4 7 6,427 5,813 0 0 11 0 0 49 5,873 10 0 0 15 530 554 Westpac Banking Corporation – 30-Sep 2,316 7,834 4,838 75,582 1,218 161 650 759 93,358 57,541 616 15,977 6,236 3,525 1,091 1,335 86,321 143 1,913 0 -105 5,086 7,037 New Zealand Division Bank Sector Total 16,483 39,264 30,975 393,631 14,292 997 4,993 4,163 504,798 287,453 5,476 94,543 33,811 33,436 9,400 5,155 469,274 12,945 2,763 1,234 626 17,956 35,525

Balance sheet breakdown Assets ($Million) Liabilities ($Million) Equity ($Million)

Entity shares shares reserves reserves provisions) Intangibles Total equity Total Total assets Total instruments instruments instruments instruments Fixed assets Fixed Other assets Balance date Total liabilities Total Debt securities Debt securities Other liabilities Retained earnings Retained earnings Subordinated debt Subordinated Customer deposits Customer Derivative financial Derivative Derivative financial Derivative Head office account Head office Share capital – ordinary capital – ordinary Share Convertible debentures/ Convertible Loans and advances (less Loans and advances balances with other banks and investment properties and investment Balances with other banks investments in subsidiaries in subsidiaries investments Perpetual preference shares shares preference Perpetual and money market deposits market and money Balances with related parties parties Balances with related Balances with related parties parties Balances with related Other equity/Cash flow hedge hedge Other equity/Cash flow Trading, investment securities, securities, investment Trading, Cash on hand, money at call and money Cash on hand, 2015 Australia and New Zealand Banking Group Limited 30-Sep 4,532 13,718 13,650 114,376 4,179 388 3,492 1,195 155,530 83,134 2,417 26,848 13,926 14,093 2,381 1,871 144,670 8,047 11 0 -10 2,812 10,860 – New Zealand Banking Group 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 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 Banking Group 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 31-Dec 582 0 0 86 0 2 0 1 670 9 4 50 0 547 0 3 613 60 0 0 -3 0 57 (New Zealand) Limited 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, 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 Auckland Branch 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 31-Dec 426 495 116 3,775 448 1 18 30 5,309 3,181 182 740 72 1,040 0 50 5,265 0 42 0 2 0 44 Limited, New Zealand Branch 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 – 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 New Zealand Division 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

Size & strength measures Profitability measures Entity Entity 31 Dec 14 31 Mar 15 30 Jun 15 30 Sep 15 31 Dec 15 31 Mar 16 30 Jun 16 30 Sep 16 31 Dec 14 31 Mar 15 30 Jun 15 30 Sep 15 31 Dec 15 31 Mar 16 30 Jun 16 30 Sep 16

Total assets49 ($Million) Interest margin (%) ANZ43 135,290 140,253 150,664 152,038 152,289 160,801 163,538 163,282 ANZ43 2.33 2.23 2.21 2.23 2.22 2.18 2.24 2.17 BNZ44 79,658 81,926 85,657 86,629 86,819 89,913 91,906 92,325 BNZ44 2.28 2.34 2.36 2.30 2.21 2.21 2.15 2.12 CBA + ASB45 74,149 76,994 80,147 81,321 81,785 86,012 85,678 88,764 CBA + ASB45 2.40 2.13 2.20 2.13 2.12 2.09 2.22 2.04 Heartland Bank46 2,543 2,623 2,772 2,825 3,290 3,334 3,489 3,595 Heartland Bank46 5.06 4.91 4.83 4.81 5.18 4.58 4.53 4.46 Kiwibank 17,064 17,948 18,228 18,686 18,858 19,227 19,199 19,372 Kiwibank 2.17 2.12 2.07 2.13 2.07 1.98 2.02 1.96 Southland Building Society 2,826 2,858 3,094 3,163 3,286 3,408 3,506 3,543 Southland Building Society 2.97 2.93 2.86 2.67 2.63 2.61 2.57 2.63 The Co-operative Bank Limited 1,770 1,795 1,838 1,896 1,971 2,029 2,109 2,179 The Co-operative Bank Limited 2.90 2.80 2.81 2.77 2.71 2.61 2.51 2.46 TSB Bank Limited47 5,908 5,908 5,991 6,208 6,299 6,424 6,475 6,522 TSB Bank Limited47 2.15 2.15 2.12 2.14 2.08 2.03 2.02 2.12 Westpac 82,442 82,087 87,455 88,203 88,416 90,309 91,518 92,708 Westpac 2.28 2.26 2.32 2.28 2.17 2.11 2.12 2.08 Total 401,649 412,392 435,846 440,968 443,014 461,455 467,418 472,291 Average 2.34 2.26 2.28 2.25 2.21 2.17 2.20 2.13 Increase in gross loans and advances (%) Non-interest income/Total tangible assets (%) ANZ43 1.53 1.75 3.60 0.86 1.51 1.47 1.94 0.43 ANZ43 0.79 0.90 0.76 0.80 0.33 0.77 0.62 0.37 BNZ44 1. 16 1.57 1. 01 1.72 2.35 2.24 1.80 2.46 BNZ44 0.63 0.94 0.97 0.83 0.42 0.71 0.59 0.56 CBA + ASB45 1. 19 2.75 2.04 2.29 2.53 1.87 2.38 3.43 CBA + ASB45 0.63 0.70 0.53 0.66 0.77 0.57 0.47 0.62 Heartland Bank46 4.50 4.10 4.11 3.21 22.19 3.02 3.29 4.01 Heartland Bank46 0.41 0.41 0.36 0.39 0.89 0.45 0.45 0.26 Kiwibank 2.20 2.04 1.50 2.24 2.51 0.53 1.55 1. 74 Kiwibank 0.73 0.57 0.57 0.59 0.62 0.55 0.46 0.56 Southland Building Society 2.88 2.50 11.34 2.71 2.04 2.67 3.19 3.15 Southland Building Society 0.96 1.03 0.98 0.95 1.03 0.97 1. 0 0 1. 0 0 The Co-operative Bank Limited 2.93 2.19 3.24 4.28 4.23 2.87 4.01 4.97 The Co-operative Bank Limited 1. 13 0.24 1. 0 0 0.99 1.02 0.64 0.94 0.98 TSB Bank Limited47 3.04 1.73 5.27 3.39 4.57 2.80 3.26 5.32 TSB Bank Limited47 0.35 0.40 0.24 0.38 0.20 0.21 0.21 0.35 Westpac 1.67 1.51 1.57 1.99 1.38 2.22 2.88 1.86 Westpac 0.73 0.66 0.73 0.69 0.63 0.62 0.65 0.71 Average 1.50 1.90 2.34 1.65 1.85 1.85 2.22 1.90 Average 0.71 0.80 0.74 0.74 0.51 0.67 0.58 0.53 Capital adequacy (%) Impaired asset expense/Average gross loans and advances (%) ANZ43, 48 11.80 12.60 12.50 13.30 13.30 13.70 14.40 14.30 ANZ43 0.05 0.07 0.10 0.06 0.09 0.08 0.18 0.14 BNZ44 12.28 12.90 12.59 12.67 13.26 12.58 12.48 12.06 BNZ44 0.02 0.26 0.10 0.38 0.22 0.23 0.15 0.08 CBA + ASB45 12.70 12.10 12.70 13.30 14.10 13.70 14.30 12.70 CBA + ASB45 0.29 0.14 0.08 0.09 0.14 0.17 0.31 0.12 Heartland Bank46 13.76 13.36 12.86 12.85 14.46 14.01 13.78 12.71 Heartland Bank46 0.52 0.44 0.74 0.56 0.34 0.41 0.63 0.49 Kiwibank 13.30 12.40 13.40 12.80 12.80 12.90 12.90 12.80 Kiwibank 0.16 0.08 0.03 0.08 0.07 0.10 0.02 0.00 Southland Building Society 16.07 15.61 14.59 14.21 14.27 13.76 13.50 13.63 Southland Building Society 0.43 0.79 0.31 0.62 0.33 0.67 0.21 0.44 The Co-operative Bank Limited 16.50 16.50 16.30 16.20 15.80 15.80 15.50 16.10 The Co-operative Bank Limited 0.07 0.05 0.16 0.04 0.08 0.05 0.08 0.16 TSB Bank Limited47 13.48 13.85 13.71 15.77 14.86 14.52 14.62 14.59 TSB Bank Limited47 6.06 0.04 0.07 -1.47 0.08 0.31 0.07 0.12 Westpac48 11.60 12.10 12.40 13.30 13.90 14.00 14.00 13.10 Westpac 0.12 0.07 0.08 0.01 -0.01 0.06 0.02 0.32 Average 0.17 0.13 0.09 0.11 0.11 0.13 0.16 0.16 Net profit ($Million) Operating expenses/Operating income (%) ANZ43 425 452 427 467 347 416 430 349 ANZ43 39.02 36.61 38.03 36.34 43.30 42.41 36.61 43.98 BNZ44 232 270 295 241 192 259 229 233 BNZ44 39.67 32.91 34.47 35.81 42.26 34.94 39.69 40.28 CBA + ASB45 214 218 212 234 243 220 211 245 CBA + ASB45 37.04 37.60 41.19 37.73 36.76 37.98 37.66 36.03 Heartland Bank46 10 11 10 10 15 14 15 14 Heartland Bank46 48.13 47.14 48.45 49.94 49.59 43.96 42.55 43.51 Kiwibank 36 29 27 33 38 29 24 28 Kiwibank 54.10 62.07 67.52 59.84 59.35 62.39 71.30 67.80 Southland Building Society 5 4 6 4 5 6 7 7 Southland Building Society 66.27 62.82 60.39 67.73 70.22 57.43 60.30 59.65 The Co-operative Bank Limited 3 2 2 3 3 2 2 3 The Co-operative Bank Limited 77.95 78.63 80.40 77.65 73.38 81.41 80.27 75.07 TSB Bank Limited47 -18 16 13 25 13 10 14 14 TSB Bank Limited47 37.95 43.59 44.68 42.50 47.83 51.65 45.26 47.36 Westpac 244 247 266 249 251 239 249 224 Westpac 38.97 37.89 38.95 43.11 40.48 40.80 41.25 38.92 Total 1,151 1,249 1,259 1,266 1,107 1,195 1,181 1,117 Average 39.98 37.90 39.80 39.52 42.52 41.07 40.33 42.02

$MILLION MAJOR BANKS: % 18 MAJOR BANKS: NET PROFIT 500 21 NON-INTEREST INCOME/ 1.20 TOTAL ASSETS 450 1.00 ANZ 400 ANZ

BNZ 350 BNZ 0.80 CBA +ASB 300 CBA +ASB

KIWIBANK 250 KIWIBANK 0.60 WESTPAC WESTPAC 200 0.40 150

100 0.20 50

0 0.00 DEC 14 MAR 15 JUN 15 SEP 15 DEC 15 MAR 16 JUN 16 SEP 16 DEC 14 MAR 15 JUN 15 SEP 15 DEC 15 MAR 16 JUN 16 SEP 16

MAJOR BANKS: INTEREST % MAJOR BANKS: % 19 MARGIN 2.50 22 OPERATING EXPENSES/ 75 OPERATING INCOME 2.40 70 ANZ ANZ 65 2.30 BNZ BNZ 60 CBA +ASB 2.20 CBA +ASB 55 KIWIBANK KIWIBANK 2.10 WESTPAC WESTPAC 50 2.00 45 1.90 40

1.80 35

1.70 30 DEC 14 MAR 15 JUN 15 SEP 15 DEC 15 MAR 16 JUN 16 SEP 16 DEC 14 MAR 15 JUN 15 SEP 15 DEC 15 MAR 16 JUN 16 SEP 16

MAJOR BANKS: INCREASE % MAJOR BANKS: IMPAIRED % 20 IN GROSS LOANS AND 4.00 23 ASSET EXPENSE/AVERAGE 0.50 ADVANCES GROSS LOANS AND ADVANCES 3.50 0.40 ANZ ANZ 3.00 BNZ BNZ 0.30 CBA +ASB 2.50 CBA +ASB

KIWIBANK 2.00 KIWIBANK 0.20 WESTPAC WESTPAC 1.50 0.10 1.00 0.00 0.50

0.00 -0.10 DEC 14 MAR 15 JUN 15 SEP 15 DEC 15 MAR 16 JUN 16 SEP 16 DEC 14 MAR 15 JUN 15 SEP 15 DEC 15 MAR 16 JUN 16 SEP 16

The bank directors’ attestation The Reserve Bank uses thematic The Reserve Bank has always been —— discussion of bank-specific reviews to conduct in-depth reviews of clear that it places a heavy emphasis case studies where attestation regime has been a cornerstone areas of particular supervisory interest, on the role of self-discipline and obligations would be expected to of the Reserve Bank of including current or emerging risks the critical nature of the directors’ be a material consideration; and New Zealand’s approach to within the banking sector. We do not attestations in the quarterly —— a desk-based review of presuppose that a thematic review disclosures, given that the Reserve prudential supervision for two information provided by banks that will identify material compliance Bank does not either conduct onsite supports and enables directors decades. Overall, we believe breaches or supervisory concerns. supervision or regularly require to reach conclusions on the that it has stood the test of Recent thematic reviews have focused independent verification of information quarterly attestations. on problem loan identification and provided by banks.50 This was a theme The confidentiality of all information time well. Our discussions with loss provisioning for the dairy sector, that received considerable attention obtained will be protected under banks’ Internal Capital Adequacy from the International Monetary Fund directors indicate that directors the provisions of section 105 of the Assessment Processes (ICAAP), (IMF) during their recent New Zealand take their responsibilities Reserve Bank Act. outsourcing arrangements, and credit Financial Sector Assessment very seriously. origination policies and practices for Programme (FSAP).51 It is expected that the review will housing and rural lending. For 2017, provide a comprehensive view of best the Reserve Bank will undertake a industry practice with regards to the Grant Spencer thematic review to gain insights on role of bank directors, and the scope Deputy Governor and The Reserve Bank’s approach attestation approaches and governance and nature of their involvement in to banking sector regulation and Head of Financial Stability arrangements for New Zealand the attestation process. In particular, supervision is heavily focused on Reserve Bank of New Zealand incorporated banks. the findings of the review could ensuring that bank directors and The thematic review of the bank contribute to future Reserve Bank senior managers have the right The requirements for directors to sign directors’ attestation regime will help guidance for bank directors regarding incentives to manage their bank’s off on their banks’ quarterly disclosure us assess the effectiveness of this their attestation obligations, and may risks (self-discipline), and ensuring statements enhance the effectiveness distinct New Zealand approach. As contribute to future refinements to that market participants have the of self-discipline and market discipline, such, its purpose is to: the Banking Supervision policy on appropriate information, incentives by strengthening the accountability Corporate Governance.52 and mechanisms to influence the of bank directors and increasing the a. assess the effectiveness of behaviour of banks in a way that also market’s ability to assess the soundness the director attestation regime contributes to a sound and efficient and performance of banks. Currently, established by the Reserve Bank of banking sector (market discipline). directors are required to attest in the New Zealand Act 1989; and Where material market failures exist, quarterly disclosure statements that As with previous thematic reviews, the b. improve the Reserve Bank’s the Reserve Bank relies on formal after due enquiry, they believe that: Reserve Bank will provide feedback understanding of banks’ general rules and requirements to incentivise to all banks on the general findings —— the disclosure statement contains approaches to governance. financial institutions to act in ways from the review, including anonymised all the required information, and is that align with the public interest The review will involve consultants examples of best practice across not false or misleading; (regulatory discipline). with expertise on bank corporate the banking sector. The review may —— all of the bank’s conditions of governance, who will work alongside also give rise to specific supervisory We see the attestation regime as the registration have been complied Reserve Bank staff. Between 8 and 12 follow-ups where areas of concern key mechanism that supports and with over the accounting period of New Zealand incorporated banks will are identified. enhances self-discipline and, given the disclosure statement; how long it has been in place and the be included in the review, which has differing approaches adopted by banks, —— credit exposures to connected a target completion date of 30 June it is therefore timely to review how persons were not contrary to the 2017. A range of information-gathering it is working in practice. We will be interests of the bank over that tools is likely to be used, including undertaking a thematic review of the period; and some of the following: regime in 2017, which is intended to —— the bank had systems in place to —— a confidential survey of assess the effectiveness and scope of monitor and control adequately bank directors; the attestation approaches adopted by the material risks of the banking —— face-to-face interviews with a New Zealand incorporated registered group, including credit risk, interest cross-section of directors and banks, and the processes that bank rate risk, currency risk, equity relevant senior management directors use to fulfil their obligations risk, liquidity risk, operational risk, involved in the attestation process; under sections 81 to 82 of the Reserve and other business risks over the Bank of New Zealand Act 1989 (the accounting period, and that those Reserve Bank Act). systems are being properly applied.

The transition to the Financial The conduct guide sets out that the In fact, in many cases, it is the simple These themes may not be new, but FMA will take a risk-based approach act of taking a corporate vision they are developing rapidly both at Markets Conduct Act (FMC to conduct regulation. We do this by statement that sits on a plaque or home and internationally. An example Act) is complete, 190 financial assessing which financial services poster near the lifts and putting it into is foreign exchange trading services services firms are licensed, providers, and what types of conduct, effective practice on the front line. by overseas entities, and other are most likely to pose risks to fair, unregulated products that operate Additionally, we are now engaging and the FMA is now a fully- efficient and transparent markets – and deliberately outside New Zealand’s with investors to make them aware of fledged conduct regulator. For also harm investors and consumers. jurisdiction yet still manage to entice their entitlements under the FMC Act Then we’ll direct our regulatory Kiwi investors or consumers. This financial services providers, and the minimum standards of service attention and effort accordingly. impacts our market integrity, and so and behaviour they should expect from 2017 onward, conduct we will continue to warn investors As we assess risk, our focus will be when engaging with the financial about these non-regulated companies regulation is the new normal. on whether the financial services services industry. and take action where we can against providers we regulate have the We will focus on providers’ conduct any overseas companies that are interest of their customers at heart. through our intelligence-led using New Zealand’s good reputation In particular, it will be on how they Because conduct is at the core of supervision. So then, what does the for their gain. demonstrate a commitment to good the Act, it gives weight to the FMA’s FMA see as potential drivers of risk Liam Mason customer outcomes in the delivery of existing statutory mandate to monitor across the sector? We have reviewed Director of Regulation their products and services. what financial providers do, and how our foundation document, the FMA’s The benefits are worth pursuing Financial Markets Authority they do it. So, it is important to be Strategic Risk Outlook, and set out as long as the risks are appropriately managed. clear on how we will view and respond They recognise that sustainable the underlying strategic risks to to conduct. That is why we have just success is based first on achieving our regulatory outcomes, published the final version of our understanding the customer’s including conduct. 53 Although we recognise that new conduct guide, having considered need… then meeting it to the best technologies bring benefits to submissions from a wide range of of their ability. Strategic Risk Outlook 2017 firms from the financial services investors and business – more The FMA has also published its industry during the consultation period. efficiency, lower business costs and updated Strategic Risk Outlook (SRO) better accessibility – the increased It is not just the FMA saying this and this month. The outlook describes the reliance on technology also brings taking this approach. Regulators in consistency in our key priorities as risks. These include increased other parts of the world are saying it we shift from FMC implementation exposure to complex products for too, as are the global contemporaries into operating as a conduct-based The FIPS Survey is focussed on retail investors and data security of the local industry including, in some regulator. While the seven priorities performance, and for the FMA it vulnerabilities. The benefits are worth cases, their parent organisations. They have remained the same, there have is critical to our strategy that we pursuing as long as the risks are recognise that sustainable success been developments to the underlying communicate our view that the appropriately managed. So we are is based first on understanding the risks and drivers of risk. conduct of financial services providers supportive of technological innovation directly affects the consumers of those customer’s need (including helping We have also identified some in financial services and have services, and therefore, that affects all them to determine that need), then developing themes that will remain on regulatory settings that are flexible New Zealanders. meeting it to the best of their ability. our radar. These are: and modern in order to promote and High standards of conduct support And of course it’s already second accommodate innovation within the —— regulating in an environment of fair, efficient, and transparent markets nature for many businesses to framework of the FMC Act. rapid technological innovation and – a good result for all of us – recognise the value of good customer and change; We have introduced to the updated service and relationship management the confident participation in those SRO a deeper insight into the – the overall promise of ‘customer —— retail investor participation in markets of businesses, investors, and influences we take into account in experience’. We have engaged with complex or risky products; consumers. This benefits our economy deciding what risks are present. We the industry to help them understand —— reviewing the boundary of our and the vigour and sustainability of hope that this, and understanding how how what it is done for commercial regulatory perimeter; and financial sector performance. So, the we will view conduct, helps financial reasons can also, with not much transformation to focus on conduct, —— helping investor decision-making service providers understand not only adjustment, help to build more which is at the heart of the FMC Act in changing market conditions. what we are focusing our resources confident New Zealand investors. – and in the FMA’s mandate – is also on, but also the results we are commercially astute for the financial aiming for. services industry.

In our last review, we Arguably, financial services have But regulatory reflections have Instead, organisations will be asked highlighted the raft of been most impacted by the Credit revealed an interesting contradiction. to demonstrate how their culture and Contracts and Consumer Finance Despite global increases in consumer- conduct consistently deliver good emerging legislation that Amendment Act 2014 (CCCFA) that based legislation and regulation aimed customer outcomes. They will need was heading in the direction came into effect in June 2015. It at improving consumer experience, to provide evidence-based positive strengthens consumer protection by instances of misconduct continue. assurance that they are achieving of the financial services defining lender responsibility principles Arguably, instances have actually good customer outcomes, rather than industry. That legislation is (Responsible Lending Code) around increased, which has driven a relying on simple negative assurance. affordability, providing customers deterioration of trust and customers’ now in force, so what does To many organisations and their with clear information and acting perception of the value they get from risk advisors, the departure from it mean for banking and ethically. In addition, the sector has their financial services provider. the simple interpretation of black- had to reconsider their fees in light most importantly, how is letter legislation and reasonably of new requirements around how the regulatory environment Moving towards change in fluid regulatory expectations has fees are calculated and charged culture and conduct caused some discomfort and changing? We may find and the requirement that these Increasing the extent and coverage uncertainty. How should you go about are ‘reasonable’. the future could bring less of legislation and regulation has understanding your organisation’s Adele Wallace ‘black letter’ legislation, Amendments to the Fair Trading failed to stem the tide of poor culture and changing it? Who should Associate Director – Advisory replaced with a shifting Act 1986 (FTA) came into effect in customer outcomes. The inherent take responsibility and where in the KPMG March 2015. These amendments culture in firms and focus on profit business should the change be driven? focus towards overarching represent the implementation of and shareholder value rather than Are there instances of misconduct that principles based on new unfair contract provisions, customer outcomes are being seen you simply don’t know about and what customer outcomes with providing new rights for consumers as potential root causes. As a result, is driving this? and obligations for businesses. we are seeing regulatory approaches a strong ethical culture The requirements have triggered a take a more holistic view of the entire Success is all about at the heart of business. number of organisations to launch organisation and a renewed focus on customer-centricity and extensive reviews of contractual terms improving organisational culture and good customer outcomes We discuss how you can and conditions across all products individual conduct. go beyond the ‘legislative and draft new standardised terms To succeed during this period, There has been a groundswell of and conditions. organisations will need to change their burden’ and instead, by discussion and interest around view of ‘compliance’ from a burden harnessing the many drivers Additionally, November 2016 signalled ‘conduct and culture’ around the that simply needs to be ticked off or for improving consumer the end of the licensing process globe with the UK’s Financial Conduct perfunctory adherence to regulation that began two years ago as part of Authority taking the lead. Closer to and instead consider good conduct outcomes, can create wider financial services reforms to home, the FMA have recently released and positive customer outcomes innovation and opportunity regulate the industry further. All fund a consultation paper on their view of as the ‘way things are done in managers, discretionary investment conduct and how they will consider this business’. in the market. management service providers and conduct in their supervision of derivatives issuers must meet new providers. The consultation states that governance and capability standards “Good conduct is vital to fair, efficient We see the focus on good conduct The financial services industry has under the Financial Markets Conduct and transparent markets, and ensures as a key driver of innovation which recently seen a significant increase Act 2014 (FMCA). the confident and informed not only ‘future proofs’ a business participation of businesses, investors … but which also strengthens in both legislation and regulation and Now that we have emerged from the industry is increasingly feeling the and consumers.” In Australia, APRA the overall market and increases this flurry of legislative change, we have released their insights into risk perceptions of integrity, building pressure. Both 2015 and 2016 have can reflect on the drivers behind been busy years for legal, risk and culture, and Australian Securities and consumer trust and creating their inception. It isn’t hard to see Investments Commission’s rhetoric is brand advocates. compliance departments, so we take that this legislative activity signalled a look at some of the changes and strongly levelled at firms’ culture and a championing of the consumer tone from the top. As the international consider some practical considerations and a concerted effort by regulators for implementation. landscape continues to evolve and to improve the behaviours and mature, we can expect further interactions that companies have changes to the domestic landscape, with their customers. but this is unlikely to be driven by the ‘black letter’ legislation that we have seen in recent years.

Turn risk into opportunity by harnessing customer centricity and the drivers of change

Digital disruption Social media Competition from new market entrants Level of customer advocacy becomes and Fintech are changing traditional @ more visible. Increased opportunities distribution models. for client interaction. Organisations that are succeeding They are ensuring that customer- Conduct risk are taking a holistic view and centricity is at their heart of everything Customer expectations Regulatory intervention really examining their strategies they do, starting at the very top of the Customers desire transparency and Sustained regular and government

Conduct risk is the risk that and business models. The world organisation and embedded into their simple products that perform as expected. $ investigation increases the risk of fines strategic business decisions is changing fast, and customer business models, training, product Trust in banks is at a low. and unsustainable strategies. negatively impact on the ultimate expectations are increasing, so design and performance management. customer. Usually, these are these businesses are harnessing the At the same time, they are starting decisions that are made quite drive for change and taking a wider programmes which change the overall EXTERNAL DRIVERS early in the value chain, for view by focusing on their longer- culture and measuring that customers example, in strategy setting and term strategies and strengthening are getting real value from their core product design. Conduct is all relationships with customers business offerings. about balancing the financial rather than simply on short-term Organisations may be missing interests of the company with the profit increase. a significant opportunity for needs of the customer and driving These are organisations who have improvement by innocently believing trust and sustainable income by realised that being customer-centric that they have a positive culture being more customer-centric. not only makes good business sense, and conduct environment. Clearly, Innovation but it is absolutely at the core of their businesses don’t overtly decide business model and the source of that their strategy will be to mislead Culture Sustainable future growth. They have identified customers; however, our experience business Culture is what drives day-to-day that good culture and conduct is a is that sometimes poor customer model Pressure behaviour. The accumulation differentiator in an industry where outcomes are inadvertent or an for products and pricing are very similar, unintended consequence of a decision change Customer of years of corporate history advocacy and the messages that senior and they are starting to stand out made much higher up the value chain, leadership drive through the for all the best reasons. We see the and usually this is because there business, either through their focus on good conduct as a key driver has failed to be a clear analysis or own behaviours or expectations, of innovation which not only ‘future understanding of the potential risks to that form part of the attitudes and proofs’ a business where new Fintech customers as a result of a decision. players, digital disruptors and peer-to-

beliefs around the organisation It is clear that this absolutely starts at Employee

peer entities are starting to take market satisfaction as to what constitutes expected the top and the drive for change has to share by focusing on ethical behaviour performance. Organisations may come from senior leadership and has and delivering to customer needs, but believe that they have a strong to permeate through their decisions, which also strengthens the overall system of controls to prevent behaviours and expectations, market and increases perceptions of inappropriate behaviour, but continually setting an example for the integrity, building consumer trust and culture has a huge influence whole of the organisation. DIVERGENT INTERESTS on an employee’s course creating brand advocates. of action when faced with Regulation is certainly one aspect of competing priorities. Change is driven from the pressure to improve customer the top outcomes, but it’s clear that failing to move at pace to harness the myriad Successful businesses are reviewing Company Corporate of other drivers: changing customer effectiveness and re-evaluating their strategic and Risk culture expectations; employee satisfaction; priorities and their core business efficiency digital disruption; and increasing Risk culture is the way the firm models to identify the potential competition from Fintech entrants, identifies and deals with those risks to customer outcomes; they could mean that traditional providers People Employee Customers risks. It is all about creating an are looking at a broad blend of data Client get left behind by failing to balance the development satisfaction environment whereby risks can and inputs to give them real insight. and reward and needs divergent interests of the customer, be identified and called out. They are talking to their employees employees, the company and the This includes having the right and their customers, looking at wider market. Now is the time to turn people taking responsibility for complaints and social media to see risk, monitoring and managing those risks into opportunities. Society/ where those moments of truth Shareholder risks that are emerging, Regulator are, discovering where they aren’t Shareholder Contribution and dealing with issues that delivering, identifying their root causes returns to society have crystallised. and defining what needs to change.

The relief for many in the primary sector was palpable in the last quarter of 2016 as Global Dairy Trade (GDT) auction after GDT auction delivered sizeable price gains. The GDT index finished the year 67% above its low point on 5 April 2016. This has driven in a welcome increase in farm gate milk prices after a number of tough seasons, Ian Proudfoot but leaves some big questions Partner – Audit hanging over the future Global Head of Agribusiness direction of the dairy industry. KPMG

For farmers, higher prices mean a return to profitability and stronger cash flows. For some, this delivers the ability to restart their lives, having cut everything but the bare essentials of life to the bone to survive the last two years. The sense of relief for suppliers to the industry is almost as great, because banker’s price increases reduce the emotional and financial challenges of managing distressed loans and deliver opportunities to start supporting customers to grow.

Building a platform for a The opportunity to grow high value I fear that the momentum for structural Commodity price movements must The industry needs to address how Correctly scaled production, open stronger industry crops or raise alternative animals change will slow until a time (which not deflect the industry from taking it invests as a priority to avoid being communications and the best on the Canterbury Plains to secure may not be too far into the future) the steps that need to be taken to challenged by the same overcapacity technology will not deliver an The last three years have been tough premiums available globally for novel that we again see cyclical commodity cement its future as the world’s issues that have beset the red meat additional dollar to the farm gate if for dairy farmers, for many they will products gives farmers more choices prices falling and the need for change leading artisan producer of nutritious, sector for 20 years. we do not understand our consumers not recover the equity that has been over land use than they have had comes back into focus. sustainable, grass-fed dairy products. and their dreams, aspirations and lost until we are well into the 2020s, Recognition of the need to have open for decades. problems properly. It is only through but I believe the industry has built The only problem with delaying change channels of communications with deep connectivity with the people the foundations for a stronger future. There has also been some good is that the rest of the world is moving What does that change all stakeholders is critical. Premium that will ultimately consume the food Having come through the last few progress on seeking to monetise the forward regardless of what we choose agenda look like? consumers want to understand who that we produce that we can create years bruised, but with a reinvigorated unique attributes of our dairy system. to do or not to do in New Zealand. My view is that everything must is producing their food, what their the products that solve the problems desire to compete, the right decisions Synlait Milk’s grass fed products We are a small player in a large global start with the ultimate consumer of values are and how they bring those they face on a day-to-day basis. As now will enable the dairy sector to for Munchkins in the US are a good system that is growing at faster rates our products and the need to design values to life through their business. a consequence, I believe the most capture more of the value it grows in a example of recognising that others will than we are. This makes our traditional and deliver the products that will fit They also seek assurance about how a important investment the industry can rapidly changing global market. place financial value on what we have role in the market less relevant. As within their lifestyles and shape the product’s integrity is maintained across make is in becoming more connected historically taken for granted. Lewis new export competitors emerge, new health outcomes that they are looking the supply chain and confidence that with their consumers, by having more Road Creamery has demonstrated forms of milk are commercialised to achieve. the product they buy is the product people embedded into the places that Many farmers… have been forced to that there is a place in the market for (we expect a cultured milk product to we sent. This means the industry This means we need to be growing their consumers live. focus on the fundamentals of their innovative, premium products. They be commercialised during 2017, for needs to be open in telling its stories less milk (most probably a lot less milk) business. have also showed that these can be example, natural milk grown without and about the opportunities to do to provide processors with a greater successfully commercialised without the environmental and welfare better. It also needs to invest in the ability to produce and deliver these The farmers that want to be part the overhead burden that traditional challenges associated with animals), platforms that provide consumers value-added products. This is a major of a value chain that rewards them Inside the farm gate, many farmers stainless steel infrastructure places on governments support their domestic total confidence over the integrity of change for an industry that has used for doing the right things will make operating today have never had to a business through the use of modern, producers to deliver food security, and the products they purchase. Product volume growth as the key benchmark a difference. face the challenge of such a sustained flexible business models. consumer preferences evolve, we run assurance is only one aspect of the to measure its success. To achieve an period of low prices. They have been the risk of being left behind if we do digital transformation facing the forced to focus on the fundamentals optimal supply position, it increasingly not respond effectively. primary sector. The fusion revolution There is not a single prescription of their business. In particular, they There has also been some good feels like the time is approaching (where digital, physical and biological that will work for every organisation. have learnt which costs have a direct progress on seeking to monetise for the repeal of the Dairy Industry technologies are being fused to Each organisation will follow its own nexus to growing a better product, and the unique attributes of our It is critical that we recognise a Restructuring Act and its obligations create disruptive new solutions) is strategy, appropriately balancing a as a consequence, offer the potential dairy system. price recovery driven by an upswing which sustain uneconomic and transforming every aspect of agri-food desire for return with the risk that it is to earn a higher return. Many farming in commodity prices means nothing environmentally marginal supply. businesses. From the augmentation prepared to take on. It is clear from our businesses are run more effectively of substance has changed. of a farmers intuition through data discussions that there are those that today than they were three years ago. These developments suggest that The industry needs to address and analytics, to the mechanisation of aspire to catch significantly more of the more people clearly understand what I also believe that there is increasing how it invests as a priority to avoid tasks utilising robotics and unmanned value they grow and as a consequence the pathway looks like to develop a It is critical that we recognise a price acceptance that simply growing being challenged by the same vehicles and the use of blockchain they are looking to shake up the value dynamic, flexible, high performance recovery driven by an upswing in more volume is not the answer to overcapacity issues that have beset to provide confidence over product chains they are currently part of. dairy industry that is increasingly commodity prices means nothing of growing value. Many argue that we the red meat sector for 20 years. integrity, the primary sector faces a sheltered from commodity substance has changed. Prices are The farmers that want to be part of have, as a consequence, reached significant period of investment; into price movements. doing what they have always done a value chain that rewards them for and probably passed peak milk both the technology, and the people – responding to demand and supply doing the right things will make a production. Tightening environmental It also means that there needs to needed to operate them, if it is to conditions rather than reflecting difference. The researcher with an regulation and changes in community We should never forget we a significant reassessment of how capture the opportunities available in a material shift in the strategy of innovative consumer solution will expectations will make future dairy are not alone the industry deploys capital. It is the market. the industry. We cannot afford to make a difference. The digital analyst farm conversions more difficult. As a However, I am not hopeful that the investment into brands, consumer be complacent to expect this price with a game changing algorithm will consequence, discussions are starting industry will continue its progress experience, and world class innovation recovery to be any more permanent The fusion revolution… is make a difference. It is these and other on how land, irrigated during the dairy towards capturing its potential as that will differentiate our products than previous price recoveries, transforming every aspect of change agents prepared to stand up to boom, can generate higher returns price pressures reduce. For many, in the eyes of a consumer and particularly as supply can be dialled up agri‑food businesses. complacency and do things differently from the access to water in the future. unrelenting low prices highlighted the secure stable and sustainable price faster today than was possible in the that will shape the pace of change in need to shift away from commodity premiums, rather than more stainless past to take advantage of peak prices the industry. They will progressively markets to deliver more consistent, steel processing plants on the ground. (something that is already apparent, detach the industry from the peaks sustainable returns. There is a strong with the US milk pool already starting and troughs of the commodity cycle correlation between high prices and to grow in response to the recent and accelerate the arrival of a more comfort with the status quo. price increases). prosperous future for our country.

“The horse is here to stay Now we take for granted 24/7 access Mobile payment apps also have the That’s why bank branches remain an to banking services. While banks have capability to store loyalty cards, public important banking channel. While the but the automobile is only retained branch networks, the vast transport cards and special offer look and feel of bank branches has a novelty – a fad,” said the majority of banking transactions today vouchers. Soon that wallet stuffed changed over time, they still provide Michigan Savings Bank are done through a range of other with cards will be a thing of the past. access to traditional banking services. innovative channels. That includes It will be possible to conduct most The focus of branches these days, president in 1903. He was being able to call your bank’s contact of your everyday transactions on however, is more on providing advisory advising Henry Ford's lawyer centre from the comfort of your own your smartphone. services. Branches also help us to home, or anywhere else for that maintain a physical brand presence in not to invest in the Ford Current innovations are propelling matter, seven days a week. If you’d the communities that we’re part of. us towards banking that is seamless Motor Company. rather not speak to a customer service and integrated with other personal Customers overwhelmingly now representative, you can do most of technology. Nobody wants a prefer to use more convenient ways of your banking yourself, either at home mortgage; they want a home. Nobody banking, which means some branches on a computer, or on the go with a wants a student loan; they want an no longer make commercial sense. banking app on your smartphone. Where bankers may once have education. In a similar way, banking They’re often replaced with smart shunned technology, the opposite is Banks are constantly improving the is likely to become more focused on ATMs that can accept and count notes Karen Scott-Howman true today. This century we’ve seen functionality of their internet and life events and personal aspirations, and coins, which are instantly available Chief Executive, a massive leap in access to personal mobile banking channels. As well as rather than financial transactions. as cleared funds in your account. digital technology. That’s clearly meeting your everyday banking needs, Given the drive for seamlessness and New Zealand Bankers’ Association Some banks are also providing digital reflected in how we’re now banking. online and mobile banking allows you convenience, it’s quite possible that educators, to help customers learn These technological advances mean access to a huge amount of the latest the future of banking means you won’t how to get the most out of online we’re managing our money in ways information about your bank’s products even realise you’re banking. banking services. that many did not foresee. What’s and services, financial capability behind these changes, and what does tools, and how they’re contributing to Customers aren’t the only ones driving the future hold? your community. Current innovations are propelling changes in banking. Other digital us towards banking that is The extraordinary evolution of enterprises are challenging banks seamless and integrated with other banking today is largely driven by in their own sector. They include Soon that wallet stuffed with personal technology. changes in customer preferences, peer-to-peer lenders and alternative cards will be a thing of the past. It and competition both inside payment platforms. Once again, it’s will be possible to conduct most and outside the banking sector. about providing people with seamless of your everyday transactions on Banks have embraced technology This innovation in banking services and convenient financial services. your smartphone. in the quest to provide an ever has come in response to customer Banks operate in a very competitive more seamless experience for demand and behaviour. In a highly environment, which is good for both their customers. competitive environment, we have our customers and the industry. We As little as five years ago, the thought worked out that attracting and welcome the entry of the ’Fintechs‘ Remember the good old days? of banking on your mobile phone retaining customers is essential to because it encourages us to keep We used cheques a lot more, and would not have occurred to most of our success. To do that we need improving the experience of the made bank account deposits and us. Now we can even make everyday to keep our customers happy. And all-important customers we seek to withdrawals by visiting our local bank payments using our mobile phones. to keep customers happy, we’ve attract and keep. branch, filling in handwritten forms; The age of the mobile wallet is here. vastly improved access to banking all within civilised ’bankers’ hours‘ While contactless card payments services. Better access to banking It’s an exciting time for banks and their from Monday to Friday. You might’ve still seem fresh and innovative, it’s services mirrors the industry’s customers. We can enjoy innovations found yourself caught short if you now possible to make contactless customer satisfaction ratings. The undreamt of even a few years ago, didn’t withdraw enough cash for the payments simply by waving your latest Consumer NZ banking survey while retaining traditional banking weekend. Bank branches were an phone over the payment terminal. found that 86% of bank customers are channels. Banking as we know it essential part of every community for The mobile payment app on your satisfied with their bank. will continue to change over time, both households and businesses. smartphone holds your bank card and customers will continue to drive While banks are constantly looking at information, which is used to make those changes. Things started to change in the 1980s what’s next in providing even better mobile payments. when ATMs appeared. You could finally access to banking services, we’re get cash on the weekend! Since then also conscious of meeting the needs innovation in banking hasn’t stopped. of all our customers.

Digital disruption: two words Artificial Intelligence and K2 proposes a new banking standard. Start-ups with high levels of New mental models are critical to that, when combined, often Predictive Analytics = No more waiting in a queue for the automation, unconstrained by legacy the future of industry, in other words, ‘Chat Bots’ administrator behind the desk to log IT systems, will be able to rapidly thinking in a new way. Albert Einstein stir anxious provocation. on, find your details and check your pivot according to customer desire, said, “We cannot solve problems To illustrate the possible disruptive date of birth while simultaneously potentially attracting some of the most with the same thinking that created According to the KPMG 2016 opportunities and increasing answering the phone. The administrator profitable customers from traditional them”. Outdated mental models are automation within banking and Global CEO Outlook, 82% can now turn their attention to more banking firms. According to the intellectually bankrupting our future finance, we look at the emergence of of CEOs are concerned that important or exceptional activities. popular business book Exponential economic prosperity, so the time to sophisticated digital assistants, chat Organisations, by Salim Ismail, “New reimagine the future is now. their current products and bots, built on artificial intelligence (AI) organisations are ten times better, and predictive analytics. One of the Simplification of The sheer pace of change and market services may not be relevant faster and cheaper than yours.” first publicly released banking chat transaction processes disruptions are forcing leadership to customers three years from bots is from Bank of America, named Banking experts agree that there will teams to create a more structured way now. The root of the CEO Erica. Erica is meant to go live later be significant cost reductions on the Lessons from to anticipate the future. The temptation other industries apprehension may stem from this year, and banking customers will horizon due to technology solutions to remain focused on the certainty be able to interact using both text providing financial institutions with Long-established industries – of current operational approaches is the speed of digital change. and voice. simplified transaction processing. e.g. newspaper, photography and understandable, but ultimately will Steve Graham The elimination of old vertical practices music, have all been decimated by they prove to be strategically effective? The difference with Erica is that she and statistical modelling will be made technological change. Less high Perhaps this is why leaders worry so Director – Head of Digital Futures pushes ‘insightful’ information toward KPMG possible by highly effective algorithms profile industries have also been much about future relevance. The exponential explosion of users based on a better understanding based on AI, cognitive computing, digitally/technologically disrupted. Leaders must talk about the vision technology applications and the of what they want, rather than only big data, Internet of Things (IoT) Author Jeremy Rifkin notes the of a digital future and recognise the assumption that digital solutions providing users with requested and sensors. Anything predictable energy sector is in the throes of inherent possibilities that change are the panacea for all the corporate (pull) information. or repeatable will be automated by being disrupted, highlighting that the brings. It’s also important to engage ills will only perpetuate the role robots, leaving the human being to marginal cost of renewable energy is the disruptive thinkers within your of digital disruption. Despite this other forms of work. zero and therefore energy eventually Some believe the future of banking organisation. Management guru Gary perpetuation, industry is being becomes free. As this scenario is here now. Hamel has said that young people, disrupted by more than just digital unfolds, the impact on traditional dissidents and those working on the sources. Consequently, it’s important Anything predictable or repeatable revenue is significant. In Germany, geographic and mental peripheries to develop a comprehensive view will be automated by robots, in less than seven years 25% of AI is picking up momentum and, of your organisation are the most of disruption that not only includes leaving the human being to other electricity is now green electricity. according to consulting firm Forrester, interesting, free and open thinkers. new technologies, but looks at new forms of work. How? A million buildings are using 6% of jobs will be lost to AI within the Look for rebels. The good news is that business models, simplification of technology to convert to micro power next five years, exacerbating a fear they won’t be difficult to find and they processes, competitive threats, plants. Germany is now producing within the banking sector of being left can be excellent participants in the customer behaviour and the significant ‘free’ energy, decoupling behind. However, Forrester goes on Change in competition development of future scenarios. transformational mindset, which is from the traditional grid and breaking to say that banks should avoid offering critical to the way forward. The innovative Fintech space is ‘hot’ the reliance on the multi-billion dollar The need to embrace uncertainty and chat bots to customers for another two and underpins the disruptive nature of As the Head of Digital Futures at global power and electricity companies drive the strategic conversation is to three years, as they don’t think the change supported by new business KPMG New Zealand, I am of the view – e.g. E.ON, EnBW. Did they anticipate now more vital than ever. A strategic maturity of the technology is there yet. models. Additionally, digitally focused that successful financial firms will the speed of change and erosion foresight framework provides the organisations with strong balance systematically develop plausible future Despite the Forrester prediction, of market share? Which disruptors structure to achieve this. It enables sheets and significant networks of loyal state scenarios. Perhaps some of some believe the future of banking will break the reliance on traditional leaders to explore future worlds, customers – e.g. Apple, are potential the trends that are highlighted in this is here now and is synonymous with banking services? develop a collective understanding of competitive threats in the banking article will contribute to the framing of the BankBot, a prototype application preferred future state scenarios and and finance space. Alibaba is already a a transformed digital future. designed by the Polish digital design The way forward challenge existing assumptions. and communication agency K2. competitor. Despite being recognised as the world’s largest e-commerce How do we govern amidst continuous You may also choose to do nothing, BankBot itself is a robotic bank technology change and the need for teller, financial advisor, and personal business, the Chinese company went and as one of my favourite cartoons public and raised billions of dollars transformation? What can we do to illustrates: “Instead of risking anything assistant all in one. “It understands prepare ourselves? How do we lead natural language, so you can ask through the largest initial public new, let’s play it safe by continuing our offering in history within the US in in a volatile, uncertain, complex and slow decline into obsolescence!” BankBot to transfer money, open a ambiguous emergent future? new account, cancel a credit card, et 2015. Alibaba has established an all- cetera,” says Maciek Lipiec from K2. digital online bank, with no physical branches and 24/7 operating hours.

Interest in blockchain technologies is growing rapidly if measured by the total value of venture capital investment in blockchain technologies and Bitcoin (a new form of digital currency) companies. This interest in distributed ledger technologies is remarkable given that five years ago, it was barely a blip on investors’ radars, known mostly for

Mike Clarke underpinning the Bitcoin Partner – Head of IT Advisory digital currency. KPMG

Interest in blockchain gaining momentum These days, a wide range of companies are exploring blockchain as the potential solution to numerous challenges both inside and outside the banking sector. During 2015, Citibank, Santander, Wells Fargo, HSBC and numerous other big banks announced partnerships with Fintech companies looking to leverage blockchain to make banking processes more efficient, timely and secure. Other organisations such as the Australian Stock Exchange have been public about their blockchain initiatives.

These organisations, along with a Corporate investors need to qualify For example, many banks continue to Now is the time for A balanced approach What is blockchain number of others, believe the potential their expectations when it comes work with legacy IT systems, which experimentation Having said that, investors need to disruption blockchain could create – in to blockchain and the obstacles may not be capable of supporting Given how the technology is evolving, take a balanced approach to their technology (also terms of decreasing transaction times, associated with achieving value. The blockchain initiatives or will provide at KPMG we believe that now is blockchain investment strategies. To self-automating smart contracts, technology is not a silver bullet that significant challenges if linked to new known as distributed the time for experimentation to be the disruptor investors envision, lowering transaction costs, minimising can solve every problem tomorrow. blockchain technologies. In the area understand the practical benefits. blockchain protocols and solutions ledger technology)? fraud and opening the door to micro- As with every technology, blockchain of payments, the technology based Corporates that encourage use-case must evolve to support the reliability, The description below is from transactions – is impossible to ignore. solutions will need time to be tested on Bitcoin consensus mechanism testing – whether for the securities efficiency and scalability requirements Blockgeeks.com. As a result, interest in blockchain is and to be adapted to the industry consumes more computing power and trading lifecycle, the processing of expected in the industry. It also gaining momentum, with investment requirements at scale. We already see will require initially more resources Picture a spreadsheet that is a loan or digital identity verification needs to be a differentiator, rather expected to grow throughout 2017. early adoption in some payments use than the current solutions used by duplicated thousands of times – and whoever can learn from this than simply an enabler, and it needs cases, but as the complications grow many banks provide. Beyond these across a network of computers. experimentation will be better to be adoptable by all parties in the with asset transfers, for example, technical challenges, there are some Then imagine that this network Being honest about the positioned to understand, possibly banking supply chain – a fact that will more time will be needed to qualify specific areas where fundamental is designed to update this challenges with blockchain adjust course and quickly achieve the require significant collaboration across the technology and understand the issues relating to business models spreadsheet regularly and you But does the potential live up to the most value. industry, regulatory bodies and those full implications. need to be addressed. have a basic understanding of hype? While blockchain’s potential supporting potential solutions. In regard to testing, we see some the blockchain. is interesting, there are substantial To get the most value from blockchain, In spite of these challenges, short- early examples of this trend taking In this regard, we see many barriers that must be overcome in corporate investors need to encourage term blockchain opportunities do Information held on a blockchain hold in the marketplace. A great organisations and engineers now order to implement it successfully industry experts to define the exist, and there remain many reasons exists as a shared and continually number of the major financial services undertaking deeper analysis on within banking and capital markets. problems blockchain can help resolve, to continue to pursue innovation in reconciled database. This is institutions we work with have proof of blockchain and a more balanced and Regulatory and market changes, in find the best and most cost-effective distributed ledger technologies as a way of using the network concept (POC) and prototype initiatives pragmatic view emerging. We see particular, could hamper blockchain’s technology solutions, and work the potential benefits associated with that has obvious benefits. The underway related to blockchain. ourselves as part of this group and use on a global scale. Some analysts through any limitations to scope, a breakthrough down the road are blockchain database isn’t stored Larger financial institutions are now advocate for selective and targeted also suggest that blockchain has scalability, velocity and usability. great. One area we see the technology in any single location, meaning considering how to test for scalability, experimentation as a first priority been burdened with excessive offering particular benefit in the short the records it keeps are truly The key to success is the combination validate initial hypotheses, build that will yield greater benefit down investor expectations – ones that term is digital identity, or what others public and easily verifiable. of the right skills: longer-term target operating models the road. cannot realistically be fulfilled. At are calling a digital financial passport. No centralised version of this and enhance business cases based on the rate investment is growing, it’s —— cryptography; Many banks are excited about this information exists for a hacker their POC/prototype results. possible that investors looking for opportunity and can see positive to corrupt. Hosted by millions of —— distributed ledger technology; immediate, short-term success may improvements related to how digital computers simultaneously, its —— deep industry and regulatory be disappointed. identity is currently being facilitated data is accessible to anyone on experience and knowledge; and Corporates that encourage use-case and enabled at banks. Improvements testing – whether for the securities the internet. —— technologists who can effectively in this area could enable better choice trading lifecycle, the processing of The technology is not a silver navigate clients through the current Some cases where blockchain and portability of customers between a loan or digital identity verification bullet that can solve every IT landscape. technology could be utilised are: financial institutions and ultimately – and whoever can learn from this problem tomorrow. As with every There are challenges in each of these higher customer satisfaction as experimentation will be better —— smart contracts; technology, blockchain solutions areas when it comes to deployment individuals are able to take control positioned to adjust course and —— governance; will need time to be tested and of distributed ledger solutions to over and gain benefit from their own achieve the most value. to be adapted to the industry —— supply chain auditing; the mainstream components of the identity. Beyond digital identity, there requirements at scale. —— prediction markets; banking system. are a number of other important niches where blockchain could make early —— protection of intellectual We are also seeing work being done gains as well. property; related to enhanced international payment capabilities as well as the —— identity management; application of distributed ledger —— anti-money laundering (AML) principles to needs for identity and know your customer management and other areas. It (KYC); is clear that the move to test and —— land title registration; and experiment with distributed ledger —— stock trading. technologies is well underway in financial services.

The implementation date of The US Financial Accounting Standards In New Zealand, most of the Impairment is on top of the Although IRB banks can leverage from IFRS 9 is fast approaching Board (FASB) and the International larger banks have the advantage agenda and will have an the expected loss modelling currently Accounting Standards Board (IASB) of relying on the IFRS 9 projects uneven impact on banks carried out under Basel, we can see for registered banks in originally embarked on a project to run by their parents. However, care that operationally there are differences Most of the time and effort on the have a single set of standards on should be taken to ensure that the between Basel’s and IFRS 9’s New Zealand. IFRS 9 Financial IFRS 9 projects globally and within financial instruments accounting. impairment models developed for ‘expected loss’ concepts which the the region is being spent on the Instruments is expected to However, due to divergence on certain the New Zealand entities adequately IRB banks will need to work through. impairment aspects. This is consistent be one of the most significant aspects of the project, particularly reflect the impact on the specific The banks that are using the IRB with the fact that this area is probably impairment, this was not achievable. characteristics of their portfolio in approach are Australian subsidiaries standards to impact bank the most complex within the standard the context of the New Zealand where most of IFRS 9 impairment The IASB published the complete and difficult to interpret. IFRS 9 is financial reporting since economic environment and that local model design work is being carried out version of IFRS 9 on 24 July 2014 a principles-based standard and management is able to understand the by the Australian parent. the introduction of IFRS which was adopted by the External generally does not prescribe specific differences between the regulatory in New Zealand. Banks in Reporting Board (XRB) in New Zealand details on methods of application. and accounting expected loss models. on 4 September 2014. However, Hence, selecting techniques and New Zealand should now have For the other banks that do not have The availability of quality data and the macro hedging project that estimating credit losses to develop or the advantage of relying on their resources for implementation of at least commenced their deals with the portfolio interest rate change existing regulatory expected parents to provide a solution, there is a IFRS 9 is a significant concern for Rajesh Megchiani hedging carried out by banks is still loss models involves a high degree of assessment of the impact of relatively different challenge ahead of standardised banks. being finalised by the IASB. Until management judgement and methods Director – Financial Risk Management IFRS 9. Through this process, developing expected loss models that KPMG the completion of this, banks have may vary between institutions. Strong gaps relating to systems, meet the requirements of IFRS 9. an accounting policy choice under governance and controls would be Standardised banks face a different data and resources should be IFRS 9 to continue applying the hedge expected in the way judgement challenge as the impairment for identified and a roadmap for accounting requirements under There are significant disclosure is exercised, with the oversight regulatory capital purposes is based IAS 39. of the board audit committees implementation developed. implications of the standards. on current ‘incurred loss’ accounting throughout implementation. provisions under IAS 39, and hence Implementation status – any increase in the level of provisions globally and in the region Globally, the regulators are is likely to have a direct impact IFRS 9 is a principles-based In this article, we discuss the very active in the IFRS 9 space. on their regulatory capital ratio. Globally, banks have begun standard and generally does implementation status of IFRS 9 Prudential, securities and audit Standardised banks may also be at a to significantly intensify their not prescribe specific details on projects globally and in the region. regulators are watching very closely. disadvantage as they don’t currently implementation efforts towards the methods of application. We have also highlighted some of adoption of IFRS 9. A number of They are expecting robust, high- have the systems and models to the practical challenges that banks large global banks are well into their quality implementation of the new calculate expected loss like the IRB face and how they are rising to implementation projects, but equally, requirements and transparent banks. The availability of quality data The financial and operational impact these challenges. there are many who still have much disclosure of the impacts. and resources for implementation of the new impairment requirements work left to do. Almost all banks feel of IFRS 9 is a significant concern for There are significant disclosure on banks in New Zealand will differ that they have less time for a parallel standardised banks. IFRS 9 does Background to IFRS 9 and implications of the standards. depending on whether they apply run than they originally anticipated. This result in standardised banks having to current status However, most of the banks standardised or internal rating based is a bit of a concern as management put in complex expected loss models IFRS 9, the new financial instruments are currently more focussed on (IRB) approaches for calculating may not have adequate time to assess that, although they do not need to be accounting standard, will replace determining their impairment regulatory capital. the drivers for difference in the level of accredited by most regulators, will still IAS 39 Financial Instruments: methodology than on the related provisions when compared to IAS 39. Banks using IRB already use an need to meet the requirement of the Recognition and Measurement and is disclosures. The qualitative and expected loss approach, and hence accounting standards which are not effective for annual periods beginning quantitative disclosure requirements the impact on capital may be minimal. as prescribed as Basel and hence will on or after 1 January 2018. have extensively increased, and Globally, the regulators are very However, these banks may be be challenging. banks will soon need to design The IAS 39 replacement project was active in the IFRS 9 space. grappling with situations where the these new disclosures and identify largely driven by requests from the IFRS 9 expected losses may exceed gaps in the data that would need G20 following the global financial the expected regulatory losses during to be filled to meet the new crisis, to reduce the complexity of an economic downturn, as IFRS 9 disclosure requirements. accounting for financial instruments applies the ‘point-in-time’ approach and to move to a more forward-looking compared to ‘through-the-cycle’ model for the recognition of expected approach required by Basel. losses on financial assets.

…but other aspects of IFRS 9 With respect to the new hedge However, before the benefits of IFRS 9 should not be missed accounting requirements, due to the can be realised, the road towards the deferral option available for banks, January 2018 deadline appears to be Beyond impairment, banks this is not an area many banks have very bumpy. have realised that they cannot focused on, and they are waiting for underestimate the impact of the macro hedge accounting project to classification and measurement Interaction with regulatory be finalised. However, banks that do aspects of the standard. Classification stress testing and see volatility in the income statement of financial assets will be based on the capital planning under IAS 39 should consider whether type of contractual cash flows and the The Bank of England recently made an there are opportunities to remove business model for managing those announcement that all banks would or reduce this under IFRS 9 which assets. Banks should evaluate the have to calculate their 2017 stress- is aligned more closely with risk terms of their existing financial assets, test results and capital planning under management strategies, for example, particularly loans and investment IFRS 9, which is believed to cause a hedging of aggregated exposures and securities, to ensure that they are larger hit to capital. However, it still hedging using cross currency interest classified and measured appropriately. indicates banks will soon need to rate swaps. In some instances, certain financial be ready to build the requirements assets that were previously measured of IFRS 9 into their existing stress at amortised cost are now required Opportunity to align finance testing and capital planning models. to be measured at fair value, which and risk data It is a matter of time before the stress will introduce volatility in the income Successful implementation of this testing and capital planning carried statement. Banks should also ensure standard will require leadership by out in New Zealand will need to that their new product approval both the CFO and the CRO to ensure incorporate the impacts of IFRS 9. process takes into consideration the that the impact of the standards implication of the new classification is well understood and can be and measurement principles of IFRS 9. articulated to stakeholders. A number The need to engage with IFRS 9 Some examples of features that of organisations, both globally and becomes more pressing by the day. banks are considering may impact the locally, are looking to use this as classification and measurement are an opportunity for risk and finance as follows: prepayment options where data aggregation. The need to engage with IFRS 9 the penalty for prepayment does not becomes more pressing by the meet the reasonable compensation day. Banks that have not yet started criteria of IFRS 9 and insurance The road towards the January 2018 considering the implications should bundled loan products. In addition, deadline appears to be very bumpy. start straight away, and banks that new processes may need to be put in have IFRS 9 projects in place should place to assess the business model ensure that their plans are on track under which financial assets are held. If successfully implemented, it will to address the key challenges and For example, principles need to be encourage the finance and risk evolving interpretations of IFRS 9. established for sales within the held- departments at financial institutions, to-collect business model under which who had historically operated investment portfolios are held, and somewhat in silos, to move towards processes need to be put in place to convergence and start using the same monitor these sales. underlying assumptions, practices and calculations to model future events. In the long run, it will hopefully lead Banks have realised that they to increased transparency for the cannot underestimate the impact stakeholders who will be able to get of classification and measurement a more accurate understanding of the aspects of the standard. underlying risks of a bank through the financial statements they receive.

REINZ is fortunate that REINZ Having collected real estate TABLE 8: YEAR-ON-YEAR PERCENTAGE COMPARISON: AVERAGE VS. MEDIAN VS. HPI – BY COUNCIL55 data for more than 25 years, Chairman, Dame Rosanne Meo, has an existing working relationship with Auckland City Christchurch City Tauranga City Wellington City the Real Estate Institute of head of Motu and former chairman of the RBNZ, Dr. Arthur Grimes. Average Average Average Average New Zealand (REINZ) holds Date Dr. Grimes has a good understanding sale Median HPI sale Median HPI sale Median HPI sale Median HPI an invaluable set of house of REINZ and current methods price Yo Y Yo Y price Yo Y Yo Y price Yo Y Yo Y price Yo Y Yo Y price information. Over recent to measure housing activity. He Yo Y Yo Y Yo Y Yo Y understood the potential held in years REINZ has invested in 2010 November 2.8% 2.9% 0.0% -1.4% 1.2% -1.4% 2.4% -4.7% -3.1% -0.3% 1.2% -1.4% REINZ data and kindly introduced significant improvements and the REINZ team to Bernard Hodgetts 2 011 November 0.0% 3.7% 7.2% 10.6% 6.4% 4.2% -1.1% 0.8% 0.2% -5.6% -3.1% -0.8% innovations in data capture to and the Macro-Financial Team at the 2012 November 14.4% 12.6% 11.9% -1.3% 4.3% 6.5% -1.5% -1.5% 2.6% 9.5% 6.4% 3.1% ensure this data was being RBNZ. Through this introduction, a partnership was formed to do an 2013 November 7.4% 8.3% 13.0% 10.8% 6.7% 10.6% 8.4% 8.4% 4.7% 5.0% 5.2% 1.9% leveraged to add value to its empirical analysis on HPI methods members and the industry. using REINZ proprietary data. 2014 November 13.6% 13.6% 11.8% 10.7% 11.0% 7.1% 6.8% 7.7% 2.7% -1.7% -1.3% 1.2% Bindi Norwell In 2016 REINZ partnered The RBNZ reviewed four of the most 2015 November 13.0% 8.6% 21.9% 0.8% 1.5% 1.7% 18.7% 17.5% 26.0% 3.5% 4.8% 8.1% Chief Executive with the Reserve Bank of common methodologies used globally 2016 November 20.8% 17.4% 12.2% 3.7% 2.5% 4.1% 28.3% 26.0% 21.5% 16.4% 16.9% 23.5% to create a HPI which included: Real Estate Institute of New Zealand New Zealand (RBNZ) to sale price assessment ratio (SPAR), enhance their existing House hedonic, repeat sales and stratified Price Index (HPI). median. All methodologies could have produced a reasonable result. However, Collecting unconditional sales data The ability to disaggregate an The new HPI is the tip of the iceberg the SPAR methodology proved to be from 14,000 REINZ members is one index enables users to have more for REINZ. The level of insights the most accurate and flexible when of the clear advantages of REINZ data, confidence in the trends reported available will add tangible benefits to Measuring house price trends is a data from all areas of the country were it is more timely than council provided as outliers are managed and one-off our understanding, and New Zealand’s vital part of New Zealand’s economic considered. It displayed the lowest sales information and data. REINZ now items that can skew data are removed. understanding of the housing market. agenda and with housing typically month-to-month volatility, it was not has a HPI which is world class with It also presents reports that contain being one of the largest investments We are excited about sharing our subject to modelling changes over time the benefits of timeliness, accuracy of a higher level of market intelligence people make in their lifetime, enhanced HPI with our members, and provided robust measurements using up-to-the-moment data and the investigating a deeper level of fluctuations in prices are important to banks, economists and the public, to of underlying house market values. stability provided by having a national market activity. help track and understand underlying As shown in Table 8 on page 71, data set that is 25 years old. With the help make better informed decisions market activity. This inevitably impacts a person’s perspective of how the enhanced REINZ HPI process it is on the shape of the New Zealand on household wealth, and therefore, market is moving, and to what degree possible to generate an index specific REINZ are providing the new HPI housing market. has a trickle-down effect to other it is moving, is highly influenced by to custom parameters, subject to the as a complimentary service at a areas of the economy. Figure 24 whether they observe median price data population being large enough. council level. looks at the Tauranga City market movements, average price movements For example, it is possible to generate over time. It shows how the tough or the movements of a HPI. For an an index for three bedroom houses economic environments of the early accurate representation of underlying in a suburb in Auckland. This flexibility REINZ takes pride in its innovations 2000s and the Global Financial Crisis market forces, we advocate using makes the REINZ HPI highly valuable in property data to maximise value to were captured more completely by the REINZ HPI as it incorporates not in market analysis. its members, key stakeholders and the HPI than the raw median price. only the market factors that influence the Real Estate Industry. The housing market is constantly changes in sales price, but also the Figure 25 shows another example of in the media spotlight for this very market factors that influence the this flexibility with an index generated By further leveraging the data reason and it is essential that the underlying value of the properties for council wards within Wellington, available, the enhanced HPI is fundamentals behind the tools being sold. although this could be any geographical a quantum leap in the level and used to measure this sector are the boundary or property attribute, such as frequency of housing market reporting, best available. bedrooms or school zones. bringing New Zealand in line with This analysis was the first time world class standards. that the RBNZ had utilised such a rich data source to compare common methodologies.

New Zealand banks have Some of the drivers of the underlying Typically, successful banks are structural cost problems include: pursuing cost productivity in a demonstrated a strong track consistent way: record of stability and growth, —— A shifting and broadening of customer expectations. Groups —— Leverage analytics and customer ranked highly in cost-to- of customers’ expectations are insights to rationalise customer, income ratio comparisons shifting, creating a different and channel, product and regional with international banking broader set of expectations investment and make business and needs. decisions with certainty. peers. This has come from —— New competition. New forms —— Improve customer satisfaction a combination of robust of competition are entering by aligning acquisition and service increases in income, the market that are geared for processes to the needs of priority innovation. They have the ability segments, creating a nimbler as well as disciplined to cherry-pick markets and they corporate core and management management of costs and are not constrained by physical layer, and creating a culture of process improvement. infrastructure or geography personal accountability. —— Increasing complexity. Product —— Optimising channels by designing Dylan Marsh portfolios have increased to cross-channel experiences that Senior Manager – Advisory provide a greater range of options seamlessly fit into the lives of KPMG However, New Zealand banking now to customers, raising complexity customers while being economical. faces the greatest array of challenges and increasing frontline time —— Customer coverage refocused in over 30 years. While the global requirements which bring into on sectors and segments that financial crisis dented customer question the profitability of deliver value. confidence and returns, the industry different products. —— Revert to core by exiting non-core is now facing a barrage of challenges —— Inconsistent use of internal and businesses, products and markets. including ‘lower for longer’ levels external services. Sourcing vs. —— Develop strategic outsourcing/ of revenue growth and return on internal capability vs. specialisation offshoring propositions and equity, regulatory change, disruption vs. managed services adds partnerships to leverage scale and disintermediation, heightened complexity, bureaucracy and and innovations. customer demand for better value unnecessary cost burdens. products and services, and growing —— Obsess about digitisation and —— The regulatory and compliance community concerns over the simplification of end-to-end burden continues to industry’s conduct. processes and products. grow unfettered. —— Transform technology through —— Staffing and operating models. infrastructure, change delivery and It is clear that a radically different Staffing levels and salaries have system/platform rationalisation. approach to productivity… is grown consistently over time with required to release resources, low spans of control, and a skew Leading financial services firms are create the financial capacity to to non-customer facing roles, tackling these challenges through clear invest in transformation and deliver particularly in head office and business-wide strategies that are built acceptable financial results. supervisory functions. on tangible insights and that draw —— Reliance on third party from the innovation of others – both origination results in sub-scale within financial services and from We strongly support the need to and inefficient physical distribution other sectors (e.g. technology). continue to invest in the medium term channels and service. to address these demands, but it is clear that a radically different approach These pressures both focus senior to productivity – akin to the sort of leaders on optimising the current cost structural transformation last seen base for profitability while positioning in the 1990s – is required to release the business to navigate future resources, create the financial capacity challenges. So how can banks rethink to invest in transformation and deliver their approach to productivity to acceptable financial results. achieve both?

FATCA and GATCA – or its 1 July 2017, with the first reporting of Practically, this involves a combination For financial institutions, there is an information by New Zealand financial of moving to the digital delivery of acknowledgement that there will be official acronym AEOI/CRS institutions due in mid-2018. services and a greater reliance on some transitional costs from updating – have, or will become part various intermediaries and third their reporting and withholding While colloquially called GATCA, parties in the tax system to source systems. However, there is an of the common parlance for and inspired by and modelled on information on taxpayers. underlying assumption that financial the US FATCA requirements, AEOI the financial sector. They institutions will largely have the is not a FATCA clone. There are For financial institutions, the key impose tax due diligence information required on hand and this, subtle but important differences. impact of Business Transformation will together with proposed reductions in and reporting requirements This will impact the design of your be more regular and greater reporting their year-end reporting to investors, customer due diligence processes. of customers’ investment income for financial institutions on should help to offset some of the Furthermore, separate reporting of information (such as interest) to the additional compliance costs. their customers and join the financial account and account holder Inland Revenue. The Inland Revenue myriad of other KYC (Know information under AEOI and FATCA to expects that there will be efficiency Based on our experience, there may your customer) regulations the Inland Revenue will be required gains for it, taxpayers and the broader be significant costs to upgrading (initially at least). This is likely to integrity of the tax system as a result. systems so that this information can on the sector. This is on top result in a duplication of processes. be provided within the timeframes Under proposals released last year, Rachel Piper Darshana Elwela (In December last year, the Inland required, particularly where legacy of the normal reporting of most financial institutions will need to Revenue released draft guidance on systems are currently being used Partner – Tax National Director – Tax interest and other investment report customers’ investment income, how AEOI will apply, which sets out for withholding tax and reporting KPMG KPMG tax and recipient details to Inland income to the Inland Revenue, some of the issues for consideration.57 tax information. Revenue more frequently than they do the scope of which is also now. That is, monthly or at the time of In addition, financial institutions being extended (but more on payment, compared with annually. will also need to manage customer that later). concerns and expectations regarding However, AEOI and FATCA are not the the accuracy of the information end of the story. The Inland Revenue expects that stored in their systems, particularly there will be efficiency gains for it, The New Zealand Government and the as the information provided may now taxpayers and the broader integrity For New Zealand’s financial Inland Revenue have embarked on an impact customers’ tax and social of the tax system as a result. institutions, this is part of the steady ambitious journey, aimed at ensuring policy entitlements or liabilities in real creep of new regulation, as tax that New Zealand’s tax system is time. This applies equally for tax KYC authorities in New Zealand and around purpose-fit for 21st century needs. required under FATCA and AEOI. This is so Inland Revenue can cross the world seek greater and more This will change how taxpayers and check information (such as whether The new investment income reporting frequent reporting on customers, intermediaries interact with the Inland the correct tax details and withholding proposals have been developed their assets, and their income. Revenue (and vice versa). Technology has made it inevitable that rate have been supplied), use this independently of the FATCA and customers and users expect access information to calculate changes to AEOI initiatives. Given the overlap of information collected under these to their financial account information The goal of Business Transformation customers’ entitlements in ’real time‘, measures, there was the opportunity in real time. If you are a tax authority, is to make it simpler and faster for and pre-populate tax returns. for rationalising reporting requirements you would be asking – why not me New Zealanders to pay their taxes, The new system relies on correct to minimise duplication. Sadly, as well? receive information, and have more IRD numbers being held by financial that opportunity appears to have certainty that their tax liabilities AEOI or ’automatic exchange of institutions and if an IRD number is not been missed. As a result, financial and entitlements are correct. information‘ is an international initiative provided by a customer, a new 45% institutions need to focus on each set aimed at combating tax evasion from non-declaration rate is proposed. of requirements and ensure that their moving financial assets offshore. It systems are able to cope. places the heavy lifting – the need for The use of technology is at the heart reporting on non-resident customers’ of the Inland Revenue’s billion dollar and their financial account information ’Business Transformation‘ project. under a ’common reporting standard‘ The goal of Business Transformation (the CRS part) – on foreign financial is to make it simpler and faster for institutions. New Zealand, along New Zealanders to pay their taxes, with about 100 other countries, has receive information, and have more signed up to AEOI. New Zealand’s certainty that their tax liabilities and commitment takes effect from entitlements are correct.

We then revisit the forecast —— Net interest margin – the The possibility of a deliberate “A study of economics usually provided in last year’s survey to see difference between interest slowdown in the lending volume reveals that the best time to buy how accurate it was, review the income and interest expense, cannot be incorporated into the VAR anything is last year.” performance of the New Zealand expressed as a percentage forecast model as all previous lending economy in 2016, and provide an of lending. figures suggest an upward trend. This Marty Allen, Comedian economic outlook for 2017. —— Credit loss rate – provision for trend suggests that the lending growth credit impairment, expressed indicator would be the most likely of Changes in our macroeconomic as a percentage of lending. the three drivers to cause fluctuation indicators may impact the industry in the forecast of the banking drivers used in our VAR model. In this section, we forecast Total industry lending is expected The regression results suggest We expect the banking industry’s profit industry’s profit before tax provided in to increase at a reasonable pace that changes in lending volume the key performance drivers before tax to dip slightly in the fourth this section. for the next two years. Our model are inversely related to changes quarter of 2016 (the actual data is not for the New Zealand banking sees lending volume increase from in unemployment. New Zealand’s available yet). The dip is caused by an $445 billion to $496 billion. The industry, namely lending, net unemployment rate is expected to increase in the Credit Loss Rate (CLR) Auckland housing market, although stabilise or decrease slightly in the interest margin, and credit and flat Net Interest Margins (NIM). slowing slightly, refuses to cool down, NIMs are expected to remain fairly coming years providing a stable The increase in CLR may be due to an encouraging further development constant over the next two years. No loss rate. platform for lending by banks. Christoph Schumacher already overheated property market in other main centres, particularly new banks entered the New Zealand As the OCR remains at record Professor of Innovation and Economics with banks taking on increasingly Hamilton and Tauranga. Continued market this year and a relatively low lows, borrowing is cheaper which Massey University more lending. When we allow for rapid growth in population teamed risk business environment paired with contributes to the anticipated increase interaction between the performance with high housing demand fuels this a low OCR contributes to steady NIM Based on these drivers, we provide an in lending volume. Another factor that drivers, the expected growth for 2017 lending increase which will continue figures. We anticipate NIMs to sit outlook for the banking industry’s profit will likely exert a positive influence on and 2018 is almost stagnant, rising well into 2017 and 2018. between 2.2% and 2.1% throughout before tax. We use a combination the lending volumes of banks is the from $1.67 billion in Q1 of 2017 to 2017 and 2018. of macroeconomic variables and In recent months, we have seen a growth in New Zealand’s population. $1.71 billion in Q4 of 2018. The outlook time-series analysis to provide conscious slowdown in lending by The CLR has remained stable Throughout 2015, New Zealand’s is similar to the growth forecast of the quarterly forecasts for the next two New Zealand banks. As cheaper throughout 2015 and 2016. We expect population grew at its fastest rate in New Zealand economy, very modest sources of funding become scarce, years ending in December 2018. In this trend to continue in 2017 with a over a decade. Overall the country’s and almost stagnant. The fact that consumers can expect interest rate last year’s survey, we introduced a slight increase in 2018 (from 0.1% in population increased by 97,300 people 58 profits show growth at all is driven by increases as banks look to maintain VAR model to our analysis as an Q4 of 2016 to 0.2% in Q4 of 2018). or 2.1%, in the year to June 2016. 59 an increase in lending volume, which low CLRs and manage the ongoing alternative to the ARIMA model we The increase, however, is marginal have used over the past five years. A offsets the continued increase in CLR. demand for housing related loans. Overall, however, we still anticipate and overall the CLR is low due to VAR model enables us to investigate the stringent lending policies of how interaction between our variables an increase in lending volume, but possibly at a slower pace than in the New Zealand’s banks. changes the forecast. The model previous year. worked well to forecast future profit Let’s now take a closer look at the before tax, and we have focused solely industry performance drivers. In our on the VAR model in this current issue. VAR model, we use the collection TABLE 9: LIST OF MACRO-ECONOMIC INDICATORS It is important to note that although of past values of our drivers and Macro variable Description Units Source macroeconomic indicators are not before tax profits; that is, a vector of explicitly used in the VAR model, the time series, in order to predict future Gross Domestic Product gdp $mn, nominal index RBNZ impact of these indicators is already values. The key benefit of the VAR (expenditure based) factored into past values of the model is its ability to rely not only on bankbill90 90-day bank bills rate %, annualised RBNZ performance drivers. The results of previous values of past drivers, but govbond10y 10-year government bond yield %, annualised RBNZ our analysis are displayed in Table 9 on also on previous values of profit thus Number of registered unemployed Number RBNZ page 77. providing a two-way interaction within unemployed the model. Average number of home loans avgqhouseloancount Number RBNZ The definitions of industry drivers are: approved Estimated population of estpop Thousands Statistics NZ —— Lending – the total volume of New Zealand lending broadly defined, that is, cpindx Consumer Price Index Index level RBNZ all interest-earning assets. housepricendx REINZ house price index Index level REINZ weeklyearnings Weekly earnings $, nominal Statistics NZ nzstocksndx New Zealand all stocks index Index level NZSE

The net migration of 69,100 people will Indeed, if this occurs and the positive Last year, weak commodity prices Comparing our 2016 forecast of The New Zealand dollar strengthened Overall, the New Zealand economy especially contribute to the anticipated relationship between NIMs and resulted in decreasing dairy exports industry drivers and industry profit through most of 2016 on the back is in good shape with modest GDP increase in lending volumes as more inflation continues, then it is expected straining rural borrowers. However, before tax61 with how these drivers of interest rates of around 2% – the growth expectations, a stabilising people will deposit their capital into that NIMs will stabilise and may even the outlook for dairy exports into 2017 actually fared in 2016, we find that highest in the G10. The demand for unemployment rate, low inflation and New Zealand and utilise the lending relax slightly. Forecast stagnant NIMs is good and forecasted milk prices all our predictions are well within our dollar was further supported by a low OCR. Stabilised dairy prices may facilities of our banks (natural increase combined with slight increases in should see the agricultural sector the 95% confidence interval. Profits a rebound of dairy prices, a rise in contribute to the ongoing stability of of 28,200).60 CLRs are the key factors that, we gaining ground on last year’s weak were slightly higher than anticipated tourism numbers and a 10% increase net exports and GDP growth. Potential believe, will moderate the growth of performance. in the first two quarters as a result in demand for kiwifruit, apples, risk factors to our GDP growth are the banking industry’s profits over the of a marginally lower CLR in Q1 and wine and seafood. The strong dollar, a slowdown of lending volume and See Table 10 with Forecasting next two years. Q2 and a slightly higher NIM in Q1. however, has put a lot of pressure international uncertainties related to Results VAR. However, as a result of a drop of the on the export and import-competing trade and immigration with Britain and Inflation is a key factor that is positively Interest rates are expected to fall Despite their obvious importance, we OCR in August and November by 0.25, sectors – export volumes decreased the United States. Furthermore, the associated with the NIMs of banks. even further, which historically do not attempt to take into account profits fell slightly below our prediction by 16% even with dairy prices on the continued strengthening of the NZ- While inflation results in an increase in leads to a drop in the CLR (a drop regulatory changes in this analysis. in Q3. Our forecast of the lending rise and conversely the increased AUD exchange rate may hurt export both bank lending and deposit rates, in interest rates puts less pressure This is a limitation since regulatory volume (marginal rise throughout the buying power of the dollar saw imports volumes to Australia, one of our largest it tends to be the case that lending on borrowers resulting in a lower changes can clearly have a large year) was accurate. increase by 14%. Overall, the terms trading partners. rates increase at a faster pace. This number of defaults). However, this impact on lending volume, margins, of trade decreased by 1.8%. In its is because environments of higher trend may be dominated by an While the recent decline in oil prices and CLRs. Preventative lending 22 September 2016 statement, the inflation often entail greater credit increase in household debt in 2016. In will surely hurt oil-producing countries, measures such as increased LVRs RBNZ expressed concerns about the risk, which banks then need to offset September 2015, household debt as it will offer benefits to New Zealand. have not eased in 2016. Instead, there high exchange rate and indicated that with greater margins. New Zealand’s a percentage of disposable income We now take a closer look at the That is, New Zealand oil prices have have been further indications that the it will take action. This was followed by inflation rate in 2016 continued a slow was 160%, up from 156.2% earlier performance of the New Zealand quite a strong cost-push effect on RBNZ will continue to tighten lending a reduction of the OCR in November. descent to 0.4% at the end of 2016. in the year. By June 2016 the figure economy. In 2016, the New Zealand consumer prices, largely driven by regulations as it attempts to balance While the New Zealand dollar is Although the RBNZ has limited scope reached 165%. Although the present economy bounced back from weak higher transport services costs. If oil out low inflation using the OCR. Fiscal expected to stay strong, indications to deal with continually decreasing levels of household debt are not GDP growth in 2015 with a 3.6% prices continue to decline, consumers policy has looked to aid the already are that it will trade a little lower in the inflation, recent developments in the particularly alarming compared with increase of real GDP. This stems from should not only expect cheaper heated housing market by selling off near future. US economy have put pressure on other countries, the rate at which a 6.9% decrease in unemployment petrol prices, but also cheaper prices state-owned housing, but has done the Federal Reserve to hike interest households become increasingly in 2016 and continued business Globally, 2016 has been an interesting for consumer goods that undergo little to support the RBNZ in their bid to rates, which would see a downward leveraged is a factor to watch. This is confidence. Additionally, a rise in year. Political developments in Britain substantial transportation. boost inflation. movement in the Kiwi dollar. possibly reflected in the slight increase private consumption supported GDP with the ‘Brexit’ and in the US with To conclude, the banking industry and in the CLR. Another related factor that growth with boosted household their recent elections have cast some the New Zealand economy are in good deserves consideration is rural debt-to- spending. The November earthquakes uncertainty over the economy for the shape. The industry outlook closely income ratios. in the central North Island saw next few years. These developments follows the economic performance GDP take an initial hit, but with could affect New Zealand trade, of New Zealand; our banks continue over $3 billion in demolition and migration and travel with these to generate healthy profits while also TABLE 10: FORECASTING RESULTS VAR reparations, in the long term this countries. Further struggles in the maintaining strong capital ratios. could see increases in both GDP European powerhouses of France VAR industry driver 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 However, profit growth is expected to and employment. and Germany, with terrorism and be very modest or stagnant, similar to Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast the refugee crisis, could cause extra Initial reactions to tightened lending the anticipated GDP growth. Upper CI 450 464 477 489 501 514 526 538 550 regulations have subsided in 2016 strain on their already overburdened Lending economies. The Chinese economy Forecast 448 454 458 437 445 453 460 468 475 482 489 496 with renewed demand for housing ($Billion) seems to have stabilized somewhat Lower CI 424 427 430 433 437 440 443 446 448 spreading into other main centres in New Zealand. Specifically, Tauranga since 2015 as fears of unsustainable Upper CI 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% Net Interest has seen dramatic increases in growth subside while tension in the Forecast 2.19% 2.00% 2.11% 2.2% 2.2% 2.2% 2.2% 2.1% 2.1% 2.1% 2.1% 2.1% Margin (%) construction and housing demand Middle East and Russia continues Lower CI 2.0% 2.0% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% as Auckland housing prices become to build. Upper CI 0.2% 0.3% 0.3% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% increasingly unaffordable. In terms of Credit Loss Forecast 0.08% 0.10% 0.11% 0.1% 0.1% 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% dwelling consent volumes, numbers Rate (%) Lower CI 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% in Wellington have increased by 7.5% while growth in other areas in modest Profit Before Tax with Canterbury experiencing slightly Forecast 1.77 1.71 1.62 1.68 1.67 1.67 1.67 1.68 1.68 1.69 1.70 1.71 ($Billion)* negative growth, a continued trend from previous years. * 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.

Non-banks industry overview

The non-bank sector has Normalised net interest margin (NIM) technological capabilities to remain The Reserve Bank of New Zealand Competition comes once again delivered a strong for the sector continues to be under competitive and provide a better (RBNZ) has taken a more concerted from all fronts and takes pressure in 2016 due to a prevailing customer experience. approach to slow the property market different forms performance with current competitive market caused by a together with IRD-imposed bank Many survey participants talked about The finance company sector is an ever- mixture of continued low mortgage accounts, IRD number requirements, year net profit after tax (NPAT) the importance of a digital strategy changing landscape that never fails to rates (particularly for credit unions and increased lending restrictions. to achieve this better customer bring about an engaging discussion on increasing by 8.17% to and finance companies), the growth This, together with changes to experience by delivering loans competition during the interviews with $207.78 million. of peer-to-peer (P2P) lending, and capital requirements, inter-subsidiary and scoring and managing credit survey participants. The sale of Fisher tighter funding channels. Normalised lending guidelines, and voluntary more quickly. & Paykel and GE Capital, the rise of NIM (excluding the results of EFN impositions by the four banks on the the P2P lending sector, house price (New Zealand) Limited) fell by In many respects the non-bank sector use of offshore income might be However, if we were to exclude NPAT growth giving people a sense of home 24 basis points (bps) to 5.85% for continues to operate as it has in the finally starting to slow the market. To of $8.14 million for EFN (New Zealand) balance sheet improvement, growing the current year (5.68% for the past, focusing efforts on their area of date this is just anecdotal evidence Limited due to the lack of comparative use of Fintech applications, changing whole sector including EFN). Lower speciality/niche where they are most from the real estate industry. It will data (EFN purchased the equipment consumer behaviour and increased funding costs were not sufficient comfortable. Participants do not feel be interesting to see what Bank finance and fleet solutions business LVR restrictions are just some of to counteract the competitive that they have experienced as much in Executives will have to say in our from GE Capital and was incorporated the more obvious elements that are pressures that were pushing lending the way of competition from the banks bank survey in this regard when we on 27 July 2015), normalised62 NPAT changing the landscape in which John Kensington rates down. or disruption, other than from the P2P meet them later this month and early showed a more modest growth of survey participants operate. Partner – Audit lenders; however, all agree that the next year. 3.93% or $7.55 million. The sector’s loan book has seen Head of Banking and Finance next wave of disruptors will come from KPMG another year of strong growth and low the Fintech space. Competitive pressures are currently impairment levels. Total gross loans Non-bank deposit takers (NBDTs) being felt by market participants on and advances grew by 13.70% or are experiencing strong competition both ends of the spectrum. Normalised NPAT growth was $1.06 billion, for which EFN accounted Operating costs remained in line coming from banks within the local driven by an increase in net interest for $0.42 billion. This result supports with operating income growth. deposit market. income and non-interest income Executives’ comments around the Competitive pressures are currently of $19.67 million (3.68%) and amount of good quality lending being felt by market participants on $10.30 million (6.41%), respectively. that is still very much available just Executives have noticed a voluntary The tightening of the credit market both ends of the spectrum: the lending Record high vehicle sales, on the back outside the edge of the banking tightening of the credit market coming has, in turn, caused a flow-on effect 63 and the funding side. From the lending of strong momentum from the prior sector’s ‘blackbox’ and the perceived from the banking sector. The banking onto some participants of the non- side, there is competition between year, certainly had an impact on the tightening of the size of the ‘blackbox’ sector is expressing some level of bank sector in recent months, as they the non-bank sector and the banking increase in profitability for the sector as banks focussed more closely on anxiety over the property market have begun to find it more challenging sector for high-quality loans that pay as five out of the seven vehicle finance their mortgage lending. and is taking a cautious approach in to secure the necessary funds they an appropriate yield. Although there is companies reported a combined extending its exposure to the property require. Non-bank deposit takers less competition from banks for newly NPAT growth of $9.98 million. Finance market. The main question that is (NBDTs) are experiencing strong originated mortgage loans, especially companies have also enjoyed an probably on everyone’s mind right now competition coming from banks within at the higher LVR’s, Executives have increase in profits on the back of is just how much longer can property the local deposit market and have pointed out that the non-bank sector strong loan growth. Credit union prices in New Zealand grow at found themselves challenged to match Total gross loans and advances is experiencing a higher than usual results were mixed, with half of them unsustainable rates? Lenders fear that the special deposit interest rates being grew by 13.70% or $1.06 billion. level of ‘churn’. The majority of the experiencing an increase in profits sharply falling property prices could offered by banks. Executives are of the opinion that the while the other half experienced challenge the market and, if severe Finance companies that are backed banks are being more aggressive this a reduction. enough, result in mortgage’s security The sector’s operating expense over and funded by a bank are also being year in taking away loans from the values coming under pressure. The operating income ratio has remained cautioned that they can no longer sector participants, particularly in cases fairly consistent with last year’s level, currently high employment rates, and Record high vehicle sales, on the borrow the same level of funds at the where that loan did not previously with a marginal improvement from low interest rates and confidence back of strong momentum from the same historically low interest rates meet the banks’ lending criteria, but 56.13% to 55.43%. Operating costs brought about by home balance sheet prior year, certainly had an impact that they have enjoyed. This is a clear now does because the customer remained in line with operating income strengthening, have no doubt helped on the increase in profitability for signal from the banking sector to has since paid down some of the growth; however, the coming years to minimise these issues to date. the sector. expect tougher times ahead as they loan balance and enjoyed a security could see a surge in operating costs shore up their capital balances and valuation increase. as survey participants increase their This is a clear signal from the source additional deposits, while also spending in developing and investing banking sector to expect tougher trying to rein in lending growth. more resources into their front-end times ahead.

These loans initially started out with Sector participants perceived that This puts credit unions and building Regulation embedded in Conduct risk is in the front of In recent months, there has been a non-bank entity as opposed to a the banking sector’s ‘blackbox’ has societies in a particularly challenging the culture Executives’ minds, with many much discussion in the media bank, as the borrower might have not fundamentally changed from last position, as their legal structure limits expressing that the sector is moving and between regulators and key Several Executives have expressed a had a minor credit issue (e.g. a late year, but what they are seeing is that them as to where they are legally to be more conduct risk regulated. stakeholders in the financial market positive stance towards having a more repayment history on a loan) and/or the banking sector is being more allowed to source funds. Credit unions The feeling expressed was that about the implementation of Debt-to- rigorous regulatory environment. They a high LVR. But after a year or two, selective in its approval process for and building societies are only allowed New Zealand has yet to be hit by quite Income (DTI) mortgage restrictions in believe that current regulation such the borrower has gone on to build mortgage loans. Some Executives to source funds from mutual parties the same wave of issues in this area New Zealand. This could be the next as the Credit Contract and Consumer up a strong credit history, and with do foresee further voluntary credit and, as such, attracting sufficient funds as some overseas jurisdictions. One hurdle for the finance companies to Finance Act 2003 (CCCFA), Anti- house price inflation, the LVR on their tightening by the major banks in the from the local deposit market is vital of the themes arising from the survey implement and Executives are anxious Money Laundering and Countering mortgage now falls within the bank’s upcoming months, amidst the risk of for their growth and profitability, and interviews was that most Executives about what form this would take and Financing of Terrorism Act 2009 lending criteria. global uncertainty and pressure on the this is increasingly a challenge. were surprisingly confident that their how it would be implemented. Their (AML) and Financial Markets Conduct availability of funding. organisation was not at risk in this unease has since been alleviated Act 2013 (FMC), while costly and area and that they had things fairly momentarily as RBNZ Governor, One area that the banks continue to time-consuming to implement, have From the lending side, there is Finance companies are well covered. While they might think Graeme Wheeler, recently announced venture into is the personal financing become business as usual and are competition between the non- encountering more instances that their organisation would not do in November that the RBNZ has no space. The banks’ behaviour in this warranted in order to ensure that bank sector and the banking sector whereby potential borrowers some of the things that have caused intention to introduce DTI measures as space appears to be unusual as, unscrupulous entities are kept out of for high-quality loans that pay an think that having security on consternation in overseas jurisdictions, of yet.64 according to some Executives, it the market and that a level playing field appropriate yield. personal loan is neither necessary one thing to be aware of is that the appears that some banks are turning is maintained. nor required. landscape is changing rapidly in this away mortgage loans that do not quite Other survey participants noted that area and behaviours that are accepted fit the ‘blackbox’, but are then providing In relation to the LVR restrictions in the current market, with deposit or even ‘business as usual’ today credit card and debt consolidation This remark was made based on that were put in place this year, the The P2P sector has continued to rates being at historically low levels, might not be appropriate tomorrow or loans, which could be considered a recent data that showed that the new set of rules presented the non- have a significant impact on the the ability to have access to the NBDT in a digital world. A simple negative riskier lending space. housing market is beginning to bank sector with an opportunity to way the non-bank sector operates. market may have some advantages. In tweet or Facebook post from an demonstrate signs of relief from capitalise on mortgage loans that were Some Executives have found that the the last few surveys, many Executives unhappy customer could lead to local, inflationary pressure. It is not clear previously unavailable to them. In growing presence and accessibility of had commented that having the NBDT national or even global exposure of From the funding side, there is if this is the result of the new LVR recent months, some Executives have the P2P sector to potential borrowers status was expensive and demanding the issue in such an explosive and viral a pronounced dip in the level restrictions that went into effect in seen a record number of mortgage have begun to change the average to maintain, but now many see it as manner that the resultant damage is of wholesale offshore funding October, or whether it is the result loan enquiries being received where borrower’s behaviour and expectations a good tool to have available in order difficult to contain. that is currently available to the of banks taking a proactive effort to LVRs were higher than the applicable in the market. Most noticeably, finance to diversify its funding and tap into a sector’s participants. There is an expectation among survey rein in higher LVR lending. However, 60% or 80% for either investors or companies are encountering more very large sector of the market that is participants that regulations such as with that being said, the RBNZ is occupiers, respectively. Executives instances whereby potential borrowers starting to become aware of just how the CCCFA and FMC could be refined still continuing to seek permission said that they have had to turn many think that having security on a personal low interest rates are and how long On the funding side, there is a further to avoid unnecessary burdens from the Government to include DTI enquiries away as they have not loan is neither necessary nor required. they have been at those levels. It will pronounced dip in the level of on the lender. For instance, one of measures in its toolbox so as to be historically done any lending in this In this respect, the non-bank sector is be interesting to see what messages wholesale offshore funding that is the Executives believed that it is able to bring them to use in a timely space. Despite having the ability finding it increasingly hard to compete are received from the banks when currently available to the sector’s unnecessary to establish a whole new manner when the right circumstance to enter the LVR > 60% or 80% with the P2P sector as borrowers we interview them for the second participants, when compared to the 65 mortgage lending space, sector seem to be more inclined to go with a AML process for a customer that has, or situation calls for it. same period last year. Executives half of the survey, as in recent weeks, participants do not have an unlimited lender that will not require any security at one point in time, had a loan with have noted that they are finding it following these comments by non- appetite to do so due to the risks to be held against the loan. the entity, has paid it off and is now increasingly difficult to compete with bank participants, a number of entities involved. Survey participants do returning for another loan. the banks in the local deposit market, The digital offerings that these in both the bank and non-bank sector believe that there is still a generous especially when the banks carry out entities have are also mentioned as have indicated that deposit rates could Regulatory pressures can also come Motor Trade Finance’s appeal of the amount of responsible lending that can special six-to-nine-month deposit highlighting how important speed and be about to rise. from unexpected fronts and have recent ruling made against it was be done just on the edge of the bank’s offers at a rate that is on par with what ease of dealing is to the consumer. unforeseen complications, as is the dismissed by the Supreme Court in ‘blackbox’, and that they should be credit unions and building societies are However, it is possible that this case with finance companies that have May. The sector has been keeping a focusing their resources and efforts in Conduct risk is in the front of offering their members. Executives advantage might be short-lived as securitised vehicles funded by banks. close eye on this case for a while, and those areas. Executives’ minds, with many within both the banking and non- other non-bank entities acquire These entities appear as though they this development has now established expressing that the sector is bank sectors have been echoing their similar channels. are being pushed to comply with the a precedence on how participants moving to be more conduct concerns over rising funding costs and same rules that banks do, as the bank should be structuring their credit fee One area that the banks continue risk regulated. the increased reliance on the offshore lender is required to apply the same charges on consumer loan contracts. to venture into is the personal lending and capital requirements to financing space. funding market. They put the blame on increased geopolitical and global loans that they are indirectly funding economic instability over the past year. through finance companies.

In response to this, the Commerce The uncertainty has arisen as the While finance companies do The partnership has allowed Flexi While this strategy may have helped Executives expect Fintech innovations Commission in September of this platforms and the legislation under sometimes operate in spaces that fall Card to leverage on MasterCard’s increase sales for the time being, if not to give rise to disruption in the year released a set of draft guidelines which they were licenced are new and just outside of the banking sector’s robust digital security programme to managed appropriately it could divert foreseeable future. In response to that outlines a set of principles which untested. The initial concept of a P2P ‘blackbox’, the Executives emphasised secure their credit cards, and give its much-needed resources and attention the likely threat, several Executives lenders could adopt to be compliant lender, and therefore the legislation that their focus in the property market customers access to a greater range away from core activities. In addition, have gone on to mention how they with the CCCFA. The guidelines under which they were licenced, has been responsible and not solely of retailers throughout New Zealand with the future digitalisation of the are taking a proactive approach to stipulate that lenders, regardless is that the platform doesn’t do the on loans with a high LVR. In regard and the rest of the world. In addition, industry, incumbent players also need seeking out collaborative opportunities of type or form, are only allowed to lending, and therefore they are not to apartment projects, the non-bank the Farmers Finance Card entitles to be prepared to change to survive as with Fintech companies and even charge fees by way of recovering able to charge interest (only a lender sector as a whole is erring on the side its members to exclusive offers that the industry does. banks to assist them. The aim of the reasonable specific direct transaction is able to do that) and the extension of caution as they tread lightly into would not otherwise be available new partnerships is to assist them Another area that Executives all costs incurred in instituting a is that as a result they are able to what is a relatively new lending market to them. MasterCard benefits by in developing sophisticated Fintech commented on was the risk of a cyber consumer loan contract. charge fees, but they should not be in Auckland. receiving increased transaction fee capabilities of their own, or to set attack and how important it was to prescribed by the CCCFA as those revenue when more transactions are themselves up to be ready for the next However, it is important to note that have a coordinated approach to staying fees relate to where lending interest processed through the use of the Q wave of disruptors that is expected to the guidelines from the Commission up with the latest intrusion techniques is also earned. A potential worst case A number of participants were MasterCard. Farmers, on the other arrive from the Fintech industry. are not legally binding and it is and sources due to the increasing scenario would see the platform considering how a partnership with hand, will likely enjoy higher sales as ultimately the lender’s responsibility frequency and complexity of cyber unable to earn interest and only charge a Fintech might bring some new its customers are now able to finance to exercise professional judgement attacks. All the Executives spoke of fees in accordance with the CCCFA; product or service to market. large purchases with greater ease. Survey participants agree on the in determining a fee structure that the need to spend more time and this would mean they would have a increasing importance of Fintech is compliant with the CCCFA. The Non-bank participants are also making a effort to protect against intrusion and, business model under which they may technologies to the non-bank sector. Commission is currently seeking conscious effort to explore beyond their in particular, the need to stay abreast not be able to recover their costs as The use of partnerships was another feedback from the public and the conventional operating model to find of where and how attacks were being the fee levels would be prescribed theme that consistently emerged industry, with the intention to finalise potential products that will complement launched. Many expressed a mix of and there would be no interest earned from comments made by Executives The two major lessons to date from the guidelines by early 2017. the service/product offering for which nervous confidence and concern about to offset any other costs. Those this year. Partnerships with other key the P2P platform have been: their customer initially approached their entity’s defences, but all of them subscribing to this view argue that members within a value chain, either them. For the vehicle financing industry, noted that it was an area where they 1. Building a faster and more such a model would never work and horizontally or vertically, to come to a The P2P lending sector has this means identifying additional would undoubtedly be tested in the streamlined ‘know your customer’ this cannot be what was envisaged mutually beneficial arrangement that also been under scrutiny by value-added services/products that future. The development of each new and deposit and loan processing and is not the way things work in will help promote further sales and the Commission. they can add onto the purchase of a product or distribution channel, while system through the use of other jurisdictions. The other view is business growth for both parties were vehicle. This could range from providing necessary to enhance the customer automation, starting from the that a consumer loan is a consumer mentioned, possibly showing that the submission of the application Executives do realise their business extended warranties, liability insurance, experience, brings with it another The P2P lending sector has also been loan no matter how it is executed and through to the disbursement/ will have to change, but acknowledge maintenance service contracts, parts, area needing to be protected from under scrutiny by the Commission there should be the same protections receipt of funds, right through that they do not know exactly how. accessories and finance. Turners’ cyber threats. since the Commission decided and guidelines. Clearly, this is open to the process for collecting and In particular, a number of participants purchase of Autosure from Suncorp to formally bring civil proceedings to interpretation both ways, and this allocating repayment and dealing were considering how a partnership in November is a good illustration of The relationship between against Harmoney in August 2016. The is why all lenders, P2P and others, with arrears and defaults. The one with a Fintech might bring some new this movement within the finance Fintech and disruptors Commission is doing this to formally and the regulators, are keen to click away technology-driven front product or service to the market. The company market. seek a ruling from the Auckland High see clarification. In last year’s publication, many of the end that speeds things up was challenge with this lies in ensuring Court that will clear the confusion as Executives from a range of Executives surveyed agreed that the frequently mentioned. that the right kind of partnership is growth of the P2P sector would be a to whether ‘platform fees’ charged to Opportunities and organisations have identified the challenges established with organisations that potential for a captive insurer market disruptor to the non-bank sector. 2. Encouraging financial literacy borrowers should be subjected to the by providing customers with 66 share the same values and vision whereby the entity provides a loan, In just a year, significant changes CCCFA. An unfavourable ruling could A recurrent theme among survey as themselves. and some form of insurance is have taken place within the personal/ interactive tools and data that will bring into question the sustainability of participants this year was the established with the individual. consumer lending space that have educate and enable them to make the current P2P model. sentiment towards the property A good example of this concept been brought about by the entry well-informed financial decisions. market. Contrary to what many would is Flexi Card (formerly known as of P2P lenders into the market. It is crucial that before an entity think, most of the Executives do not Fisher & Paykel Finance), who has With the future digitalisation of the Survey participants agree on the embarks on a Fintech campaign, see the new LVR restrictions on the partnered with MasterCard and industry, incumbent players also increasing importance of Fintech it properly considers whether the banking sector as an opportunity Farmers to develop the Q MasterCard need to be prepared to change as technologies to the non-bank sector. implementation would complement to expand their market share and and Farmers Finance Card. the industry does. those that do acknowledge that it existing service/product offerings and must be done carefully. support the sale of more business, or whether it would replace it.

Another judgement that needs to be Lenders will need to consider the At the consumer finance end of the There is also a general consensus This could place further tension on the considered is when to ‘turn off’ the trade-off between the speed and ease market the day will come when, as The non-bank sector is truly a tough amongst Executives that increased local deposit market as both the bank old model and rely solely on the new of getting a loan out to a customer, you pass a retail store, your device will lending space. regulation, significant operational and non-bank sector continue to step model for doing business. In addition, and ensuring that the necessary automatically know where you are and issues or the lack of strategic up efforts to secure sufficient funding. it is important to recognise that the and appropriate level of checks have a financier will let you know the credit resources will be the main catalysts New Zealand continues to track well true power of the disruptor is not at been performed in accordance with you have so that you enter the store The non-bank sector is truly a tough that will drive the next big round of economically after another relatively the high-tech front end as a transaction the responsible lending code. For with a pre-approved limit to purchase lending space, an area where not acquisitions or mergers within the non- benign year, with high employment enabler, but deeper where existing example, a non-English speaking an item your device has guided you to, only is there a myriad of competitors, bank sector in New Zealand. levels and low interest rates for yet margins are reduced and/or shared by person who does not truly understand because a Fintech has used data about both old and new, but every so often another year. However, this has left all participants together with the risk. the documentation may be quickly your past actions and preferences to the banks also have the tendency The future many Executives pondering whether To date, the disruptors have displayed identified in a person-to-person select the product for you. to enter into the sector if they spot As a result of world events over the the sector is adequately prepared to the initial technologies well, but are application, but might not be picked up an opportunity to do some quality past year, many Executives have deal with another financial crisis such only just starting to move into the risk during an online application process. Organic growth vs. lending or raise much-needed expressed some level of apprehension as the Global Financial Crisis (GFC), and reward share space. inorganic growth domestic deposits. With today’s society being more as to how New Zealand’s financial and just how much longer will these The sales of GE Capital and Fisher consumer driven, the demand from Despite the challenges they face, market will be impacted in the good times last. In short, they see the & Paykel Finance were the key borrowers for easier and quicker Executives have explained that they upcoming months, largely due to: New Zealand economy as being in Companies that have yet to highlights in last year’s publication. As access to funds and from depositors are perfectly comfortable with where a good place locally and, if it is to be embrace data analytics might find at 30 September 2016, the sales of 1. Ambiguity over how EU and global for a different type of return, will only they are currently sitting in the sector. affected, they generally believe it will themselves lagging behind, or even these respective entities have been trade relations with the UK will build. As the non-bank sector moves They remain content with operating in be as a result of the contagion effect out of business, as they struggle to completed, and the new entities look like following Brexit, and its lending and deposit processes the niche where they readily consider of a global issue. keep up with competitors. are now in full operation under their most recently; online, it will be intriguing to see how themselves as being good at what new structure. Lastly, the future will bring greater the sector will address the trade- they do, in an area where there is 2. US president-elect, Donald Trump, collaboration in the finance industry off between loan growth, socially In contrast to last year, we have not still a potential for steady margin and and what his American protectionist The expansion of the use of data is a in order to remain competitive in an responsible lending, and the sharing seen much in the way of acquisitions lending growth. This year, the main policies could mean to both global shift from solely using data analytics industry that continues to evolve. As of risk. or mergers. In the earlier part of the focus has been on organic growth. economic and military stability, to identify new business opportunities a result, strategic partnerships are year, however, speculation about the This means growing the business in should he decide to follow through through the analysis of transactions, to The way finance is obtained and expected to develop between market sale of UDC Finance was floated in the a way that is sustainable in the long with them. taking it to the next level by developing provided could change radically. Uber, participants as the nature of delivery of media,67 and this prompted Macquarie term for all key stakeholders (i.e. technological capabilities to predict Amazon and Netflix have all seen Increasing geopolitical and the customer experience changes and Group and Heartland Bank to both borrowers and lenders), being and capitalise on those opportunities. traditional customer views and models economic uncertainty has caused disruptors challenge existing models. announce their interest in purchasing selective about where they invest In the future, companies that have yet challenged. The same will happen Executives to be certain of one thing: UDC should the finance company be their money or who they lend to, and to embrace data analytics might find in the finance space. People don’t a continued rise in offshore funding put up for sale by its parent company, nurturing lasting relationships with key themselves lagging behind, or even actually want a mortgage, they want costs during the foreseeable months. ANZ NZ Bank. stakeholders that will ultimately drive out of business, as they struggle to a home that suits their needs, but the repeat business. keep up with competitors. way that things currently work is that While having the entire lending when they are young they struggle to afford a home; as the children grow process transitioned to an online In May, ANZ NZ CEO David Hisco platform may reduce processing time, they live in what they can afford (a smaller home than they would like); firmly reiterated that ANZ’s ownership it is not without its risks. The ability in UDC is currently undergoing a to capture generic information about and they finally afford the family home they want just as the family has grown strategic review and that no plans have the loan applicant through an online 68 up. What if finance could change to been drawn up for its sale. He did platform is one thing, but being able not, however, rule out the possibility to meet the applicant face to face enable intergenerational groups to leverage value in the parents’ home to of a sale following the conclusion of its allows the decision maker to obtain review. Most recently, in August S&P’s the necessary depth of information allow the second generation to enjoy a bigger home sooner? downgraded UDC’s long-term issuer specific to the individual’s situation credit rating by three notches based on in order to make a responsible and the expectation that UDC will be sold properly informed lending decision. within the next year and Heartland’s CEO reiterated that UDC would be a good fit within its business.

© 2017 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2017 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2017 KPMG, aNew Zealand partnership andamember firmof theKPMG network ofindependent member firms affiliated with KPMG International Cooperative (“KPMGInternational”), a Swiss entity.reserved. Allrights SAVINGS FINANCE sector non-bank the at Looking back Nelson BuildingSociety Fisher &Paykel Finance BMW FinancialServices Credit UnionBaywide Motor Trade Finance is Mortgage TrustFirst John Deere Finance Credit UnionSouth EFN (New Zealand) Credit UnionNorth Medical Securities Fuji Xerox Finance Financial Services Financial Services First Credit Union 90 |KPMGFIPS2016 Police &Families Custom FleetNZ Nissan Financial Building Society Services NZPty Instant Finance Mercedes-Benz The Warehouse Toyota Finance Avanti Finance GE Finance& New Zealand UDC Finance Credit Union LeasePlan Wairarapa Heartland Insurance Limited Ricoh ORIX

2012 GE Capital one brand under Marketed license banking Obtained

2013 Amalgamated into First Credit Union participation insurvey) (First yearof (First

Ricoh 2014 participation insurvey) is Mortgage TrustFirst participation insurvey)

Nissan FSNZPL (First yearof (First (First yearof (First 2015 72 (First yearofparticipation (First EFN (New Zealand) in survey – split out from in survey–splitoutfrom participation insurvey)

(First yearof (First LeasePlan GE Capital) GE Capital) 2016 new ownership New Zealand

Acquired by Acquired by FlexiGroup 69

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NON-BANKS © 2017 KPMG,a New Zealand partnership andamember firmof theKPMG network ofindependent member firms affiliated withKPMGInternational Cooperative (“KPMGInternational”), a Swissentity.reserved. Allrights GE CapitalNew Zealandstructure given thechange inownership (New Zealand) GE Capital (Prior to Sale) Under GECapital Business Divisions Distribution Finance Commercial Equipment Finance (GE Money) Legacy Solutions Fleet Solutions New Ownership Branding Under Company) – Wells Fargo & (Ultimate Parent Distribution Finance Commercial Wells Fargo Corporation) Element Financial (Ultimate Parent – Limited EFN (New Zealand) Pte Ltd) – KVDSingapore (Ultimate Parent Services Latitude Financial Details ofGECapital’s Sale undisclosed amount. Distribution Financedivisionfor an of GECapital’s Commercial Company announcedthepurchase On 31 October 2015, Wells Fargo & A$8.2 billion. (GEMoney)GE Capital for consumer financedivisionof New Zealandand Australian Bank purchased boththe firmKKR,andDeutscheequity manager Varde Partners, private On 15 March 2015, investment an undisclosed amount. portfolios toSankaty Advisors for commercial lendingandleasing its Australian andNew Zealand sold theremainingportionof On 10 November 2015, GECapital Finance division. Capital’s New Zealand Equipment sale alsoincludedaportionofGE New Zealand for US$6.9 billion. The in theUS, Mexico, Australia and GE Capital’s fleet management Financial Corporationpurchased On 29June 2015, Element FIPS 2016 |KPMG New Ownership Statements Under of Financial Public Disclosure Not available Available Not available 91 92 | KPMG | FIPS 2016 FIPS 2016 | KPMG | 93 Non-banks – Timeline of events73

• Jan. 2016 • May 2016 • Aug. 2016 • Sep. 2016 • Oct. 2016 • Nov. 2016 • 28th • 4th • 1st • 6th • 1st • 1st The RBNZ leaves the Official Cash ANZ NZ CEO, David Hisco, affirms The Commerce Commission formally In response to the recent ruling New LVR rules come into effect, The FMA approves Citizens Brokerage Rate (OCR) unchanged at 2.50%. that UDC Finance is not for sale. files charges against Harmoney under against Motor Trade Finance in May, restricting mortgage lending to Limited’s license to operate as a P2P the Fair Trading Act for misleading the Commerce Commission releases residential property investors across lender in New Zealand. • 6th consumers into believing they had draft guidance outlining what amount New Zealand with LVR greater than • Feb. 2016 RBNZ statistics reports a record high been pre-approved for a personal of consumer credit fees may be 60% to no more than 5%, and no • 2nd • 17th of $1.7 billion of mortgage lending loan. Harmoney pleads guilty to those constituted as reasonable. more than 10% to owner-occupiers New Zealand’s unemployment rate The RBNZ approves Scorecard Pty approved in a single week. charges, for which it could potentially with LVR greater than 80%. falls to 4.9% for the three months Limited to be the fourth credit rating face a six-figure fine. • 13th ended 30 September 2016, a first 12th Fisher & Paykel Finance announces 14th since 2008. agency to provide credit ratings for • Wells Fargo completes acquisition of • Motor Trade Finance’s appeal over its new branding as Flexi Cards Heartland invests $4 million into NBDTs in New Zealand. The other GE Capital’s Commercial Distribution the recent ruling made against it after having been acquired by Flexi Harmoney to boost its stake to 13%. 3rd three credit rating agencies include Finance business in Australia and • for charging unreasonable fees on Group last year, along with the New vehicle registrations in Standard & Poor’s (S&P’s), Moody’s New Zealand. 17th loan contracts is dismissed by the announcement of its partnership • New Zealand for the month of and Fitch Ratings. Fitch Ratings gives Credit Union Supreme Court. with MasterCard to launch the October top the 14,000 mark to hit a • 11th Baywide its first credit rating at ‘BB’ 29th Q MasterCard. Flexi Cards is the first 32‑year high. • Harmoney revises its fee structure, The RBNZ cuts the OCR by 25 bps for long-term debt issues. The sale of LeasePlan New Zealand replacing the service fee on to 2.00%. non-bank to be granted a MasterCard 7th Limited to LP Group BV receives issuing licence in New Zealand. 25th • repayments with a lender fee that • Trade Me purchases an additional approval from the Overseas 25th S&P’s downgrades UDC Finance’s will only be charged on the interest • $670,000 in shares to maintain a Investment Office. S&P’s expresses concern over the 15th long-term credit rating by earned by the lender. • 14.4% shareholding in Harmoney. growing use of interest-only mortgage Motor Trade Finance announces three notches, from AA- to A-, due loans in New Zealand. additional borrowings of $220 million to its potential sale. No formal 10th • Mar. 2016 • Jun. 2016 from institutional investors, by way of • 29th announcement has been made The RBNZ cuts the OCR by 25 bps 9th • securitising its finance receivables. by its parent company, Australia & 10th • The Commerce Commission to 1.75%. • New Zealand Banking Group, as to The RBNZ cuts the OCR by 25 bps The RBNZ leaves the OCR unchanged formally files civil proceedings Warehouse Money’s Visa cards the sale of UDC Finance. 11th to 2.25%. at 2.25%. against Harmoney in a bid to get the receive A+ certification after having • SCFL Management Limited, wholly Auckland High Court to clarify how met Payment Card Industry Data The RBNZ announces its intention to owned by Southern Cross Financial the Credit Contract and Consumer Security Standards. release formal OCR projections from • Apr. 2016 Holdings Limited, receives its • Jul. 2016 Finance Act 2003 (CCCFA) applies to November onwards. 21st 22nd license from the FMA to operate in • 6th consumer loans offered through peer- • S&P’s places UDC Finance’s • The RBNZ leaves the OCR unchanged 28th New Zealand as a P2P lender. Ricoh announces a partnership with to-peer lenders. • ‘AA-’ long-term credit rating on a at 2.00%. Fitch Ratings re-establishes an 2 Degrees as it seeks to expand its 22nd negative outlook. ‘A’ long-term issuer rating for the • managed IT service business. 30th Tuners purchases Autosure insurance • Australian parent company of John 28th The RBNZ approves Medical business from Suncorp Group for • 14th Deere Financial Limited. The RBNZ leaves the OCR unchanged • Securities Limited’s request to cancel $34 million. Lending Crowd seeks to raise at 2.25%. its NBDT licence. $5 million in capital for marketing and PledgeMe becomes the fifth P2P product development initiatives. lender in New Zealand after having its licence approved by the Financial • 22nd Markets Authority (FMA). Former Wairarapa Building Society employee found to have been misappropriating funds; no member accounts were affected.

Last year, I wrote an article These have included responses to the There are many technology providers Options Paper on possible changes One area of particular concern who can help lenders meet their We understand that the tick-box for inclusion in the KPMG to the Financial Advisers Act, Phase 2 to some of them has been the Lender Responsibility Principle approach will not be good enough Financial Institutions of the Anti-Money Laundering and increase and greater sophistication obligations when transacting with in the lending situation. Performance Survey Countering Financing of Terrorism of identity and other types of fraud their customers digitally. For example, regime, the Consumer Guarantees that they have been subjected to. there are ways to satisfactorily achieve which largely reflected on (Removal of Unrelated Lender Liability) electronic identity verification, to This is important to our members what Financial Services Amendment Bill and the Commerce access borrowers’ bank account data because we, like the regulators, Federation (FSF) members Commission’s draft guidance on The upside, however, is that it has to verify income and expenditure believe that consumers are entitled consumer credit fees – among others. not at all been about compliance for and determine whether the loan is to the same protections regardless of had been doing. This seemed our members this year and certainly affordable, and for the borrower to the channel they use to interact with With exposure drafts of amended the mood among them is that 2016 electronically sign loan agreements. lenders, and for that reason we have appropriate at the time, Financial Advisers and Anti-Money has been a good year for lending with also been reasonably vocal about the particularly as in 2015 the Laundering legislation expected The gap is in providing lenders with volumes high and arrears low. fact that care needs to be taken not to to be consulted on and enacted in the certainty that borrowers are FSF celebrated the 50th be seduced by the idea of ’disruptors‘ 2017 (again, among others), I’m not One area of particular concern to some making an informed decision and in the industry that then allows them anniversary of our founding. prepared this year to tempt fate by of them has been the increase and that they do in fact understand the an easier ride in respect to compliance. Lyn McMorran Also, because we felt we saying that our regulatory reform days greater sophistication of identity and terms and conditions of the lending In our view, a loan is a loan whether it’s are behind us, or even that they are other types of fraud that they have agreement they are entering into, Executive Director were coming to the end of the provided by a lender in a branch, via a tapering off. been subjected to. Greater vigilance when the lender is not able to assess Financial Services Federation Inc. platform by an intermediary such as a ‘once-in-a-lifetime’ regulatory has been required to spot these that understanding face-to-face. We all In regard to the former of these, in peer-to-peer lender, via on-line means, instances because the documentation know how easy it is when accessing reform of the financial particular, we still remain hopeful or whatever. The only difference is the being provided is of such high quality products and services on-line to tick services sector forced upon that common sense will prevail and channel by which the loan is accessed. that this has not been easy. the box that says that we have read that the provision of consumer credit us by the events of the Global the terms and conditions without There is clearly plenty to occupy will be removed from the scope of The FSF as a body is now looking having read them at all – it’s a question us and, like many, particularly after Financial Crisis. an amended Financial Advisers Act. at ways in which we can facilitate of wanting to buy the product and the events of recent days in North Under the current Act, consumer more information sharing amongst move on. Canterbury and Wellington, we will credit is a category two product and our members to try to prevent be pleased to welcome in 2017 with any ‘advice’ provided in relation to instances of identity fraud or the use We understand that the tick-box At that time, we were hopeful that whatever that has in store for us. in 2016 we would be able to let our this, such as the suitability of a loan of fraudulent account information to approach will not be good enough in compliance obligations take care for the borrower’s purposes, how it verify loan affordability. the lending situation, particularly when might be structured to suit their needs, it comes to the protection of those of themselves because systems The future is certainly in digitally or helping them to understand their customers who might be regarded as and processes were largely in place providing consumers with access to obligations under a loan agreement, is being vulnerable, for example, when and that we would be able to turn credit. The demand is most certainly covered by both the Financial Advisers they are people for whom English is a our attention to innovation and there for borrowers to be able to Act (FAA) and the Credit Contracts and second language. So, as a Federation, business growth. access credit through their online Consumer Finance Act (CCCFA). We we are looking to help members to devices without having to use a branch How that has actually panned out has believe this overlapping regulation is an formulate the means to meet their network. They want money when they been interesting, and it’s fair to say the anomaly that the amended FAA could responsible lending obligations and want it and fast. results have been mixed. take the opportunity to fix. still be able to innovate and offer their The difficulty for lenders is in customers access to products via a It certainly has not been the case that Realistically, we believe the reforms being able to meet the consumer variety of channels. the need to respond to regulatory to the CCCFA and the introduction of demand while still satisfying the matters has diminished, with the the Responsible Lending Code provide regulator that they are meeting their FSF having provided more than a the necessary consumer protections responsibilities as responsible lenders. dozen submissions on behalf of around the provision of consumer The Commerce Commission rightly members this year to date. credit, and this Act would always feels that consumers deserve the take precedence over the FAA if any same protections no matter what concerns arose from the regulator as channel they use to access products to the provision of credit ‘advice’. and services.

The non-bank sector The contraction in NPAT was driven Overall, the non-bank sector delivered Normalised interest income for the 31 MOVEMENT IN NET PROFIT AFTER TAX by several factors, including a plenty of positives this year as sector is up $20.82 million or 2.43%, showed an 8.17% growth $2.57 million (10.66%) reduction over half of our survey participants while normalised interest earning assets in overall reported net profit, $MILLION in interest income, a contraction improved their profitability, despite increased to $9.78 billion, a growth up by $15.70 million to 300 of 138 bps in NIM to 2.79%, a new challenges that arose and tougher rate of 6.93% or $633.34 million. further $1.05 million reduction in competitive pressures from P2P Of the seven survey participants that $207.78 million. non-interest income, and lastly, a lenders and the banking sector. 250 saw NIM growth, Ricoh and Instant steep increase of $10.25 million Summary of non-bank sector Finance were the top performers, with (from $635k) in impairment expense. Out of the 23 participants, 200 profitability measurements (see increases of 121 bps and 105 bps, Positively, Fuji Xerox Finance reported 15 reported higher profit Figure 31 – page 96): respectively. The remaining five a 7.72% or $441k reduction in 150 competitors recorded improvements levels, and 10 of those operating expenses. —— NPAT grew by $15.70 million or in the range of 2 to 45 bps. These two, 8.17%, to achieve $207.78 million achieved double-digit growth. 100 With reports of record vehicle sales along with Nissan Financial Services (normalised growth of 3.93%). Despite tighter margins due in the media over the past couple who had the 3rd highest NIM gain to a decrease in lending 50 months, a closer look at this segment —— Net interest income went up of 45 bps, were the only participants of the sector revealed that five of the by $29.78 million, to reach who were able to benefit from both rates and market volatility 0 seven vehicle financing companies $563.72 million (normalised favourable lending and funding creating cost of funds 2015 NET NET NON- OPERATING IMPAIRED TAX 2016 NET contributed a total of $9.98 million increase of $19.67 million conditions (i.e. achieving a higher PROFIT INTEREST INTEREST EXPENSES ASSET EXPENSE PROFIT towards normalised (excluding or 3.68%). interest income over interest earning pressure, the non-bank sector AFTERTAX INCOME INCOME EXPENSES AFTERTAX EFN) NPAT growth for the non-bank asset ratio, while simultaneously —— Non-interest income increased demonstrated steady growth sector. BMW Financial Services driving down its interest expense over by $20.92 million, to reach (from $1.26 million to $3.81 million) Other notable mentions are Avanti and ORIX were the only ones that interest bearing liability ratio). in net interest income and $181.53 million (normalised gain of and 467.92% (from $106k to Finance, First Mortgage Trust, Medical reported reductions in profits from $10.30 million). On the other hand, Avanti Finance non-interest income that led $602k), respectively. Securities, Mercedes-Benz Financial last year of 24.57% ($2.32 million) and Services, Ricoh and Toyota Finance, and Fuji Xerox Finance had the largest to the increase in profitability. Nissan Financial Services, in its 0.84% ($132k), respectively. Weaker —— Impairment asset expense all of whom achieved NPAT growth NIM declines of 96 bps to 9.98% and second full year of operation, is performance from BMW Financial increased by $7.83 million, ranging from 23.11% to 44.51%. 138 bps to 2.79%, respectively. continuing to show significant growth Services stemmed from a decrease climbing to a total of $47.80 million The top three performers, in terms of as it continues to establish its footing of $1.43 million in net interest income, (normalised of $7.47 million Instant Finance continues to have Non-banks’ profitability dollar value increases ranging from within the local vehicle financing the majority of which came from a or an 18.70% hike in impaired the highest NIM at 22.30%, followed increases on the back of $3.15 million to $3.75 million, were sector in New Zealand, supporting the decline in interest income as interest asset expense). by ORIX at 12.22% and Fisher strong loan growth Avanti, Mercedes-Benz Financial expense remained flat. Worsening & Paykel Finance at 11.30%. On sale of its vehicle brand and the Nissan —— Operating expenses increased by Services and Toyota Finance. credit quality also had a significant the other end, Wairarapa Building Non-bank survey participants had a dealership network. Nissan Financial $23.20 million. strong year in 2016 with the sector Services’ NPAT growth of 201.90% In contrast, Fuji Xerox Finance impact on the deterioration of its NPAT Society, Nelson Building Society, achieving an increase in net profit was driven by increased net interest reported a $10.66 million reduction in as impairment expenses rose $952k —— Tax expense went up by and Fuji Xerox Finance held the of $15.70 million to $207.78 million income of $4.98 million or 98.17%, net profit for the year, dropping from for the year, followed by a marginal $3.98 million. weakest NIMs at 2.25%, 2.30% and compared to the previous year. alongside net interest margin (NIM) a $3.95 million net profit in 2015 to reduction in non-interest income of 2.79%, respectively. If we ignore the impact of EFN growth of 45 bps to 4.04%. a $6.71 million net loss in 2016. Fuji $259k as well. Net interest margin (New Zealand) Limited, which is Xerox Finance is the only participant continues to contract Similarly, Wairarapa Building Society In relation to non-interest income, included in the survey for the first that reported a loss this year. we continue to see the same theme Participants in the sector are finding time since it started operations on had a $317k or 13.32% increase in net from previous years, with vehicle it increasingly difficult to maintain Despite normalised NIM levels 27 July 2015, the sector showed a interest income this year. financing companies contributing their NIMs. This year, only 7 out of reducing this year, normalised interest normalised74 growth of 3.93% to over $12.57 million to the overall the 23 survey participants were able income grew by 2.43% for the year, $199.64 million. $10.30 million (6.41%) growth in TABLE 11: PERFORMANCE METRICS Total to increase their NIM levels, with compared to an impressive 12.73% normalised non-interest income. one participant’s NIM staying flat. growth last year. Nissan Financial Increase in total assets 17.40% The largest increase in non-interest Normalised NIM contracted by 24 bps, Services and Avanti Finance once Increase in net profit after tax (npat) 8.17% income came from Toyota Finance, declining from 6.09% to 5.85%. again saw impressive results this year Nissan Financial Services and Margin pressures primarily stemmed Out of the 23 participants, 15 Movement of impaired asset expense with increases in interest income of LeasePlan, which reported increases from lower lending rates as a result of reported positive increases to NPAT (as a percentage of average gross loans and advances) bps 4 $8.66 million and $8.57 million, up levels. Nissan Financial Services and of $5.66 million, $3.40 million and ever-increasing competition within the from last year by 84.18% and 37.13%, Decrease in interest margin bps -41 Wairarapa Building Society were the $2.95 million, respectively. sector, without sufficient relief from respectively. Of the 23 participants standout performers this year with Decrease in NPAT/Average total assets bps -9 the lending side of the equation. surveyed, 15 saw increases in interest triple-digit NPAT growth of 201.90% Decrease in NPAT/Average equity bps -23 income for the year.

Going forward, the sector will no Avanti Finance, First Mortgage Trust, TABLE 12: GROSS LOANS 2016 2015 Movement Movement TABLE 13: MOVEMENT IN INTEREST 2016 2015 Movement longer be able to rely on lower funding Nelson Building Society, Nissan $’000 $’000 $’000 % % % (bps) costs to alleviate the pressures felt Entity Financial Services and UDC Finance MARGIN Entity on the lending side, as the cost of Avanti Finance Limited 239,940 152,977 86,963 56.85% registered the largest growth in funds will likely come under further interest earning assets in the range Avanti Finance Limited 9.98 10.94 -96 BMW Financial Services pressure. Non-banks’ Executives have 353,714 369,427 -15,713 -4.25% of $75.55 million to $224.17 million. New Zealand Limited BMW Financial Services New Zealand commented on the expected rise Collectively, these five participants 6.82 7.20 -38 Limited of offshore wholesale funding costs Credit Union Baywide 213,276 215,041 -1,765 -0.82% account for over 91.24% of the as investors demand higher returns $633.34 million increase in interest Credit Union Baywide 4.73 5.16 -43 during these increasingly uncertain Credit Union South 107,894 93,867 14,027 14.94% earning assets (excluding EFN). times. The competition for funds Credit Union South 7.69 8.08 -39 EFN (New Zealand) Limited 424,684 n/a n/a n/a Of the 15 participants that had larger within the local deposit market will loan books this year, Avanti Finance EFN (New Zealand) Limited n/a n/a n/a drive up funding costs, as the major First Credit Union 181,295 183,340 -2,045 -1.12% and Nissan Financial Services stood banks are no longer able to rely on First Credit Union 4.01 4.57 -56 First Mortgage Trust 284,282 219,436 64,846 29.55% out as having the highest growth their Australian parents to provide as rates in terms of both dollar and much funding as they have previously. First Mortgage Trust 7.17 7.69 -52 Fisher & Paykel Finance percentage increases to their loan Regulatory developments across the 694,193 656,469 37,724 5.75% Holdings Limited books. After a triple-digit percentage Fisher & Paykel Finance Holdings Limited 11.30 11.01 29 Tasman over the past year have meant growth of 150.28% last year, Nissan that Australian banks have reduced Fuji Xerox Finance Limited 427,213 438,111 -10,898 -2.49% Fuji Xerox Finance Limited 2.79 4.17 -138 Financial Services went on to add a funding levels to their New Zealand Instant Finance Limited 95,722 92,210 3,512 3.81% further $95.14 million to its loan book, Instant Finance Limited 22.30 21.25 105 subsidiaries. This was to ensure that up by more than 46.99%. Similarly, they remained compliant with rules John Deere Financial Limited 151,550 144,503 7,047 4.88% John Deere Financial Limited 3.63 3.63 0 Avanti Finance grew its loan book that restricted the bank’s non-equity LeasePlan New Zealand to $239.94 million, an increase of LeasePlan New Zealand Limited 9.67 9.91 -24 exposure to 5%, and for them to 8,588 5,491 3,097 56.40% Limited $86.96 million. The bulk of Avanti’s shore up funds to meet the capital Medical Securities Limited 4.03 3.68 35 growth was derived from an increase requirements as set out by APS 110 Medical Securities Limited 134,618 159,464 -24,846 -15.58% in its mortgage book, a space in which Mercedes-Benz Financial Services 4.13 4.23 -10 and APS 120. Mercedes-Benz Financial it has only established a presence in 545,557 513,722 31,835 6.20% Motor Trade Finance Limited 8.61 9.06 -45 Services the last two years. Total assets continue Nelson Building Society 2.30 2.57 -27 to grow Motor Trade Finance Limited 540,565 517,250 23,315 4.51% UDC Finance reported the highest dollar growth of $223.25 million to The sector continues to achieve strong Nelson Building Society 402,168 361,228 40,940 11.33% Nissan Financial Services NZ Pty Limited 4.04 3.59 45 total gross loans of $2.60 billion, the asset growth as total assets climbed a largest among our survey participants. ORIX New Zealand Limited 12.22 12.35 -12 further $1.63 billion to $11.01 billion, a Nissan Financial Services NZ 297,572 202,437 95,135 46.99% LeasePlan had a growth rate of rise of 17.40% over last year. It should Pty Limited Police & Families Credit Union 4.58 4.78 -20 56.40% to a loan book of $8.59 million; be noted that $982.25 million relates ORIX New Zealand Limited 37,504 35,614 1,890 5.31% this was the second fastest growth Ricoh New Zealand Limited 9.52 8.30 122 to the inclusion of EFN in this year’s rate when compared to Avanti survey, for which no comparatives Police & Families Credit Union 60,701 64,400 -3,699 -5.74% Toyota Finance New Zealand Limited 4.50 4.43 7 Finance who achieved a growth rate are available since this is its first year Ricoh New Zealand Limited 86,239 88,651 -2,412 -2.72% of 56.85%. UDC Finance Limited 4.50 4.87 -37 of operation. Asset growth continues Toyota Finance New Zealand to be fuelled by the increase in the 776,512 720,654 55,858 7.75% EFN (New Zealand), who was Wairarapa Building Society 2.25 2.22 3 sector’s loan book as gross loans and Limited previously known as part of the fleet advances increased from $7.72 billion Sector Average 5.68 6.09 -41 UDC Finance Limited 2,601,939 2,378,692 223,247 9.39% solutions and equipment finance to $8.77 billion. division of GE Capital, has the n/a = not available Wairarapa Building Society 108,787 104,013 4,774 4.59% third largest total asset holdings of $982.25 million, but only the seventh- Sector Total 8,774,513 7,716,997 1,057,516 13.70% highest gross loans and advances n/a = not available balance at $424.68 million.

In terms of market share for gross The increase in impairment provision Overall, 15 out of 23 participants had Operating costs often tend to be Looking into the detail, 10 entities Partnerships with Fintech companies loans and advances (excluding EFN), was the result of specific provisions an impaired asset expense over gross highly fixed in nature, comprising of had an operating ratio that was and/or banks will be on the agenda UDC Finance continues to the hold the rising from $35.54 million in 2015 loans and advances ratio in the range items such as employee remuneration better than the industry average of of non-banks’ Executives in order lead at 31.16% with a 34 bps increase to $45.77 million in 2016, for which of 0% to 0.91%. costs and administration expenses 55.43%. Of those, First Mortgage to leverage the IT capabilities and this year. Avanti Finance and Nissan an increase of $10.25 million by Fuji (e.g. overhead and rent). Whereas Trust, Nissan Financial Services and resources that they already have in While the sector continues to report Financial Services had the largest gains Xerox Finance was the main cause. operating income can be considered UDC Finance had the best operating place, in exchange for a small fee for positive recurring trends in asset of 89 bps and 94 bps, respectively, as The collective provision for the to be more variable/volatile in nature ratios at 24.06%, 18.26% and 26.25%, the use of its innovation. Non-bank quality year after year, the Executives would be expected given the magnitude year increased to $76.94 million, a due to its susceptibility to interest respectively. Given that the ultimate entities are aware that the banking all explained that this was an area that of their increase as mentioned above. $1.46 million (or 1.94%) increase from rate changes, fair value adjustments, objective of a credit union is not to sector has made significant headway they will continue to monitor carefully: Overall, 15 of our 23 survey participants the previous year. and a myriad of other factors that can make a profit, but rather to maximise in this area as Fintech entities are the adequacy of provisions held in light had a shrinking market share for gross drastically change an entity’s operating interest paid to its members (i.e. becoming an increasing threat to of a growing loan book. loans and advances. income level from year to year, despite interest expense), it is reasonable that them in the markets where they having no fundamental change to they would have the highest operating traditionally operate. Therefore, it is Improved operating its operations. expense over operating income ratio likely to see partnerships with these As in previous years, credit quality has efficiency ratio despite within the sector. types of entities as beneficial to At an individual level, the results improved year on year. The percentage higher operating costs combat disruptors and protect their were a bit mixed, with 12 out of In light of comments from Executives The ongoing expansion of the sector’s of gross loans and advances over Operating expense for the sector customer base. 23 participants showing an improved about investing more in the way of gross loans and advances balance is impairment provision improved slightly rose by 5.95% to $413.08 million, and operating efficiency ratio. Nelson Fintech to further develop their front a testament to the strong consumer for the year at 1.40%, a movement of the $23.20 million increase, EFN Building Society, Motor Trade Finance, end technological capabilities, it is confidence levels in New Zealand at of -4 bps from last year. Of those accounted for $10.48 million. On the ORIX and UDC Finance were the only expected that operating costs will the moment. Consumer confidence surveyed, 15 out of 23 showed other hand, the non-bank sector also entities whose operating efficiency continue to increase in the future. levels in the New Zealand market are an impairment provision to gross reported higher operating income ratio remained largely consistent with impacted by record low interest rates, loans and advances ratio that was levels of 7.30% or $50.71 million, to last year, with changes of just 2 bps, high employment levels and general unchanged or lower by an amount in reach $745.26 million. The inclusion 20 bps, 9 bps and 20 bps, respectively. confidence from the strengthening of the range of 0 to 127 bps. ORIX had of EFN had an impact on this result the household balance sheet. the largest improvement in terms as EFN contributed $20.74 million in of basis points and percentage change, additional operating income, more than Asset quality decreasing its impairment provision 40% of the total increase. Although competition in the lending to gross loans and advances ratio by Despite higher operating costs, the market continues to be intense, 127 bps, from 1.37% to 0.10%. sector achieved better than expected non-banks’ Executives have stressed operating efficiencies, as the operating that they will not compromise on expense over operating income ratio asset quality in order to write more decreased by 70 bps, from 56.13% loans. The current focus on market Impaired asset expense as a to 55.43%. In isolating the effect of discipline and responsible lending is percentage of gross loans and EFN on our calculation of this year’s not just a talking point resulting from advances rose by 2 bps over the operating efficiency ratio, it was recent legislation. Executives do current year, from 0.52% to 0.54%. noted that exclusion of EFN only had remember the pattern from the post- However, excluding Fuji Xerox a minor impact, as the sector still GFC era, and not fondly. Finance, which had an abnormal delivered 56 bps in efficiency savings Asset quality for the sector increase in impaired asset expense as normalised operating expense to softened with a slight deterioration of $10.25 million (or 1,613.39%), operating income fell from 56.13% coming through from credit quality impairment expense for the sector to 55.57%. measurements. Although impairment would have decreased by $2.41 million expense and total bad debt provision (or 6.13%). At that level, impaired levels for the sector rose in the asset expense as a percentage of current year, the increase is not gross loans and advances would large in the context of the size and have improved by 10 bps, decreasing growth of the sector’s loan book. from 0.52% to 0.42%. Mercedes- Impaired asset expense increased by Benz Financial Services and UDC $7.83 million (19.60%) to $47.80 million Finance had the largest decreases in from last year, while total impairment impaired asset expense of $4.06 million provision increased for the year and $3.01 million, respectively. by 10.53% to $122.70 million.

In the previous year, 2. borrowers expecting to be able to An unfavourable ruling for Harmoney One question that will be asked is 1. low business margins due to fees This will mean providing faster access borrow without providing security. – that the CCCFA does apply – could whether this information is reliable being their only source of revenue; to becoming a customer, faster we profiled P2P lending have a significant impact on the and presented in a consistent manner completion of loans and deposits, The increase in P2P lending is largely 2. high churn rate of 30–40% with explaining what it is, structure and compliance regimes of (i.e. all P2P lenders use commonly rates that are more suitable, access attributable to Harmoney’s growing borrowers being able to either its business. The developments in this understood forms of accounting to different risk-return profiles, finance how it works, where it is presence with over $357 million in obtain cheaper refinancing options area will be something to watch. principles such as NZ GAAP and NZ when and for things the consumer lending done through its platform or electing to pay off the loan going, and its potential IFRS). When we talk about presenting wants, and all that right now, and done to date. This is considerably higher In the previous year, we asked quicker; and place in New Zealand’s reliable figures, we may also mean more fairly vis a vis risk and reward. than the combined lending of its questions about how P2P lenders figures that have been audited. To 3. difficulty in achieving economies In its early phase of growth, the financial market. competitors. Despite Executives being would provide visibility into loan date, the only accounts that the P2P of scale at a level required to turn a focus of the P2P market has been to impressed with the technological performances and the extent to which lenders are required to present and healthy profit due to low business integrate state of the art technologies capabilities of P2P lenders in credit losses are being recognised. have audited are those of the company margins and the limited size of into their lending platform to provide developing a sophisticated and Harmoney has made significant At this stage, it is still too early to that manages the lending platform. New Zealand’s financial market. an enhanced customer experience impressive front-end technologies, they headway in this area by presenting comment on the financial performance From those early accounts, we will based around automation and speed continue to express reservations as key performance metrics such as One P2P Executive we spoke to holds of P2P lenders as a segment of the notice losses typically incurred by new of interaction. to the quality of lending that is taking loan performance by credit grade the opinion that P2P lending can only non-bank sector, as the platforms companies as they incur setup costs. place given that lending decisions are (i.e. default and arrears rate), realised Going forward, the next phase for the are not required to report their survive in the near term as an add- being made in minutes and the reliance annual return by investor type and On 10 October 2016, the FMA industry will be to focus its efforts on performance. The conditions of their on to the back of another business on credit scoring models. distribution of loans by grade.76 released a consultation paper leveraging the technologies that it has license require them to report the to support its growth. In addition to ‘Regulatory Returns for Prescribed its core business offering, the lender in place to support a more meaningful results of the entity that manages the On the regulatory side, legal actions Intermediary Services’. Submission might offer a P2P complementary total customer experience and a platform. Although Harmoney is not that have been brought against closed on 28 October 2016. The service until it is at a point where it sharing of the risks and rewards. required to disclose any information Harmoney during the year could have paper proposes what information P2P is profitable enough to stand alone. relating to its platform, it has taken the significant implications for the P2P Squirrel Money has done this to a It therefore still remains to be seen and Crowdfunding providers should This was also supported by the view initiative to do so. However, the figures market. The most significant of these more limited extent by providing whether the comment made by Neil provide to the FMA in their regulatory that to survive in the P2P industry disclosed have not been audited. are the civil proceedings brought investors with information about the Roberts, CEO of Harmoney, is still returns. This information is designed the lender must move beyond just against Harmoney by the Commerce current lending book size, the amount valid, namely that the New Zealand In the current year, the FMA has to help the FMA access the platform’s being a faster, one-click front end Commission in a bid to get the in arrears, the value of write-offs, and market has the potential to develop granted PledgeMe Limited, Citizens performance and to consider whether customer touch point and reporting Auckland High Court to clarify how the the size of the reserve fund. Harmoney into a $10 billion per year lending Brokerage Limited and SCFL its license requires any additional platform. The P2P lender must Credit Contract and Consumer Finance has had the benefit of a larger pool of industry if the P2P market gets the Management Limited licenses to terms. It is however, unlikely that the also provide an enhanced overall Act 2003 (CCCFA) applies to personal transactional data from which they can right support from business leaders, operate in New Zealand as P2P information will be made public. customer experience by regularly loans offered through P2P lenders. The leverage, whereas newer companies regulators and investors.77 Only time lenders. The P2P subsector also incorporating new and sophisticated draft consumer credit fee guideline that will require a little more time to Several Executives have questioned will tell who holds the right view. includes Lend Me, Lending Crowd and technological innovations, and by was recently published in September obtain more transactional data before whether P2P lending in New Zealand Squirrel Money, all of whom received sharing with its customers the rewards states that under the CCCFA, the fees they can provide meaningful and is sustainable. The main reasons for their license from the FMA last year (and risks) that come from being a charged by lenders under a consumer insightful information disclosures of a this are the: and have since begun operations. disruptor of the finance industry. credit contract ‘can not generate similar nature. As P2P lending begins to establish profit or recover more than the costs P2P lenders could have an incentive 75 a foothold in New Zealand, it is permitted by the Act’. to provide such disclosures as it becoming evident that there is no promotes investor confidence and hard and fast rule to dictate how a encourages them to provide the funds P2P lender ought to operate or what it that are needed to meet the demands should look like. This flexibility works in Harmoney’s position has been that of the platform’s borrowers. Such favour of P2P lenders as it allows them the whole premise of a P2P lender disclosures will help give investors to exercise creativity in differentiating is that, in providing a platform where insight as to the accuracy of the P2P themselves from the competition and borrowers are matched to potential lender’s credit rating model and the in developing a competitive advantage. investors for a fixed fee, the CCCFA potential level of returns they can Several of our survey participants have does not apply to the platform as it is expect. P2P lenders that do not make noted an impact from the growing not the party undertaking the lending. such voluntary disclosures as part of presence and influence of P2P lenders their business model may stand to in the market, particularly around: lose out in this respect. 1. the speed with which they are able to process and complete a client loan or deposit application; and

Size & strength measures Growth measures Provision for Net loans and Increase in net profit Increase in total Impaired asset doubtful debts/ Rank by total Total assets Net assets Entity Balance date Year advances after tax assets expense Gross loans & assets $000 $000 $000 % % $000 advances % 15 31-Mar 2016 245,398 33,664 235,526 44.51 54.71 3,607 1.84 Avanti Finance Limited 2015 158,614 25,633 148,874 -15.87 45.61 2,525 2.68 9 31-Dec 2015 358,164 25,772 344,100 -24.57 -4.80 2,922 2.72 BMW Financial Services New Zealand Limited 2014 376,204 18,645 361,500 17.65 4.59 1,970 2.15 14 30-Jun 2016 293,580 38,674 212,550 16.17 10.36 202 0.34 Credit Union Baywide 2015 266,031 36,669 213,588 0.23 5.56 412 0.68 21 30-Jun 2016 129,857 21,132 107,250 -47.43 4.09 983 0.60 Credit Union South 2015 124,749 20,748 92,945 130.47 10.51 559 0.98 EFN (New Zealand) Limited 3 31-Dec 2015 982,253 8,234 424,248 n/a n/a 361 0.10 11 30-Jun 2016 334,421 53,683 178,836 -23.34 13.36 395 1.36 First Credit Union 2015 295,007 49,955 180,613 57.98 18.37 661 1.49 10 31-Mar 2016 353,831 351,567 283,332 23.11 27.30 225 0.33 First Mortgage Trust 2015 277,951 276,174 218,586 32.10 24.84 514 0.39 4 31-Dec 2015 786,224 79,246 674,598 -1.37 4.36 14,608 2.82 Fisher & Paykel Finance Holdings Limited 2014 753,399 80,000 639,236 42.06 6.89 13,340 2.63 8 31-Mar 2016 443,537 34,256 416,333 -269.81 -1.88 10,880 2.55 Fuji Xerox Finance Limited 2015 452,025 40,965 437,476 -73.30 25.10 635 0.14 23 31-Mar 2016 99,415 27,487 91,894 18.13 2.87 2,380 4.00 Instant Finance Limited 2015 96,643 25,771 88,490 11.48 9.17 2,365 4.03 17 31-Oct 2015 157,905 17,066 151,550 6.43 4.76 0 0.00 John Deere Financial Limited 2014 150,733 14,765 144,503 -28.17 11. 17 0 0.00 13 31-Dec 2015 300,359 88,851 8,588 4.61 7.50 51 n/d LeasePlan New Zealand Limited 2014 279,400 76,015 5,491 -14.81 10.06 22 n/d 18 31-Mar 2016 141,199 26,140 134,465 32.81 -28.62 -111 0.11 Medical Securities Limited 2015 197,815 38,188 159,161 -39.15 -2.49 -129 0.19 6 31-Dec 2015 567,045 47,011 538,436 38.86 8.65 -845 1.31 Mercedes-Benz Financial Services 2014 521,923 35,841 504,549 -10.03 12.42 3,217 1.79 5 30-Sep 2016 596,520 85,174 535,237 3.27 5.30 95 0.99 Motor Trade Finance Limited 2015 566,501 82,621 512,151 13.01 4.73 105 0.99 7 31-Mar 2016 558,666 36,323 401,258 6.83 21.53 287 0.23 Nelson Building Society 2015 459,706 30,724 360,478 17.51 10.98 354 0.21 12 31-Mar 2016 302,254 6,202 294,946 201.90 46.13 1,765 0.88 Nissan Financial Services NZ Pty Limited 2015 206,839 2,395 201,212 2,435.19 134.75 1,294 0.61 16 31-Mar 2016 229,862 162,666 37,465 -0.84 -2.97 -406 0.10 ORIX New Zealand Limited 2015 236,893 147,342 35,126 -5.33 3.19 -245 1.37 22 30-Jun 2016 118,835 21,133 60,591 -10.95 9.19 8 0.18 Police & Families Credit Union 2015 108,829 19,319 64,284 26.30 10.56 -30 0.18 20 31-Mar 2016 136,592 65,557 84,578 26.18 -10.97 1,679 1.93 Ricoh New Zealand Limited79 2015 153,421 56,542 87,732 -23.49 12.50 640 1.04 2 31-Mar 2016 1,069,499 146,272 754,412 29.45 -5.32 1,183 2.85 Toyota Finance New Zealand Limited 2015 1,129,650 142,521 698,954 -55.47 -0.81 1,273 3.01 1 30-Sep 2016 2,665,019 423,999 2,573,030 2.61 9.19 7,418 1. 11 UDC Finance Limited 2015 2,440,613 365,462 2,347,163 10.68 3.66 10,427 1.33 19 31-Mar 2016 139,189 16,746 108,587 467.92 11.77 112 0.18 Wairarapa Building Society 2015 124,537 16,128 103,870 -62.54 9.09 56 0.14 2016 11,009,624 1,816,855 8,651,810 8.17 17.40 47,799 1.40 Sector Total 2015 9,377,483 1,602,423 7,605,982 -5.91 8.64 39,965 1.44 n/d = not disclosed; n/a = not available

Credit quality measures Profitability measures Efficiency measures

Impaired asset Operating Gross Operating Past due expense/ Net interest Net profit NPAT/Average NPAT/Average expenses/ impaired Interest spread Underlying profit expenses/Gross Entity Year assets Average loans margin after tax total assets equity Operating assets % $000 revenues80 $000 & advances % $000 % % income $000 % % % 2016 1,345 14,205 1.84 9.98 8.86 11,231 15,603 5.56 37.88 27.35 37.78 Avanti Finance Limited 2015 1,193 13,481 1.95 10.94 9.39 7,772 10,764 5.81 33.52 32.40 44.24 2015 n/d n/d 0.81 6.82 6.37 7,128 9,900 1.94 32.10 31.30 50.62 BMW Financial Services New Zealand Limited 2014 n/d n/d 0.55 7.20 6.74 9,450 13,139 2.57 47.44 28.35 45.37 2016 n/d 1,189 0.09 4.73 4.22 2,004 2,004 0.72 5.32 55.95 86.46 Credit Union Baywide 2015 n/d 4,414 0.20 5.16 4.63 1,725 1,725 0.67 4.82 58.08 87.10 2016 n/d 3,320 0.97 7.69 7. 1 5 338 338 0.27 1.61 74.37 91.41 Credit Union South 2015 n/d 1,858 0.63 8.08 7.56 643 643 0.54 3.16 76.49 91.97 EFN (New Zealand) Limited 2015 4,388 n/d n/a n/a n/a 8,143 9,898 n/a n/a 20.55 50.53 2016 786 5,155 0.22 4.01 3.44 1,859 1,859 0.59 3.59 57.18 87.77 First Credit Union 2015 1,628 4,437 0.40 4.57 3.98 2,425 2,425 0.89 5.39 55.49 82.69 2016 1,600 0 0.09 7. 1 7 7. 1 7 16,672 16,861 5.28 5.31 24.06 24.06 First Mortgage Trust 2015 4,388 0 0.25 7.69 7.69 13,542 14,134 5.41 5.45 23.06 23.06 2015 n/d 25,502 2.16 11.30 10.99 23,739 33,143 3.08 20.94 39.95 54.59 Fisher & Paykel Finance Holdings Limited 2014 n/d 21,645 2.10 11. 01 10.59 24,068 33,522 3.30 20.33 38.43 53.24 2016 n/d n/d 2.51 2.79 2.55 -6,709 -8,680 -1.50 -17.84 31.67 70.55 Fuji Xerox Finance Limited 2015 n/d n/d 0.16 4.17 3.97 3,951 6,631 0.97 10.13 28.19 44.01 2016 0 5,787 2.53 22.30 19.80 8,463 11,930 8.63 27.43 52.24 60.73 Instant Finance Limited 2015 0 5,739 2.69 21.25 18.53 7,164 10,298 7. 74 24.44 53.01 62.55 2015 n/d n/d 0.00 3.63 3.28 2,301 3,191 1.49 14.46 22.34 42.58 John Deere Financial Limited 2014 n/d n/d 0.00 3.63 3.34 2,162 3,008 1.51 15.80 22.85 41.48 2015 n/d n/d 0.72 9.67 9.67 6,836 9,528 2.36 8.29 34.10 76.01 LeasePlan New Zealand Limited 2014 n/d n/d 0.35 9.91 9.91 6,535 9,160 2.45 8.98 31.79 74.04 2016 12 n/d -0.08 4.03 3.17 1,352 1,878 0.80 4.20 40.63 75.55 Medical Securities Limited 2015 183 n/d -0.08 3.68 2.83 1,018 1,415 0.51 2.70 42.48 83.21 2015 n/d n/d -0.16 4.13 3.72 11,264 15,687 2.07 27.19 17.32 33.45 Mercedes-Benz Financial Services 2014 n/d n/d 0.67 4.23 3.83 8,112 11,128 1.65 22.13 16.23 30.88 2016 45 216 0.02 8.61 7.71 7,169 10,109 1.23 8.54 57.55 83.14 Motor Trade Finance Limited 2015 77 55 0.02 9.06 8.07 6,942 9,999 1.25 8.50 55.61 82.94 2016 4 150 0.08 2.30 2.06 2,753 3,841 0.54 8.21 26.59 67.50 Nelson Building Society 2015 112 0 0.10 2.57 2.32 2,577 3,587 0.59 9.06 28.34 67.52 2016 n/d n/d 0.71 4.04 3.83 3,807 11,736 1.50 88.57 15.89 18.26 Nissan Financial Services NZ Pty Limited 2015 n/d n/d 0.91 3.59 3.42 1,261 4,806 0.86 71.47 19.80 25.08 2016 n/d 0 -1.11 12.22 9.20 15,663 21,764 6.71 10.10 18.03 41.82 ORIX New Zealand Limited 2015 n/d 26 -0.71 12.35 9.25 15,795 21,950 6.77 11.32 17.26 41.91 2016 0 20 0.01 4.58 4.08 1,813 1,813 1.59 8.96 44.70 66.27 Police & Families Credit Union 2015 110 35 -0.05 4.78 4.21 2,036 2,035 1.96 11. 13 40.18 61.29 2016 n/d 3,645 1.92 9.52 8.73 6,334 8,482 4.37 10.33 81.14 83.57 Ricoh New Zealand Limited80 2015 n/d 3,285 0.75 8.30 7.44 5,020 7,538 3.46 9.19 83.67 87.13 2016 64 2,794 0.16 4.50 3.87 16,483 21,298 1.50 11.42 22.08 57.83 Toyota Finance New Zealand Limited 2015 87 3,234 0.17 4.43 3.77 12,733 1 7, 11 2 1. 12 8.46 20.61 61.99 2016 1,230 17,657 0.30 4.50 3.83 58,537 81,417 2.29 14.83 15.25 26.25 UDC Finance Limited 2015 6,369 18,919 0.45 4.87 4.14 57,050 79,323 2.38 16.14 14.89 26.45 2016 1,279 3,845 0.11 2.25 2.00 602 773 0.46 3.66 32.69 74.96 Wairarapa Building Society 2015 462 4,173 0.06 2.22 1.99 106 359 0.09 0.66 33.90 84.81 2016 10,753 83,485 0.58 5.68 4.97 207,782 284,373 2.04 11.89 33.32 55.43 Sector Total 2015 14,609 81,301 0.54 6.09 5.29 192,087 264,701 2.13 12.12 33.27 56.13 n/d = not disclosed; n/a = not available

Cyber security is an important Understanding the cyber risk concern for every financial The amount of data continues to grow exponentially, as does the rate services organisation. Daily at which organisations share data occurrences demonstrate the through online networks. Billions of risk posed by cyber attackers machines – tablets, smartphones, ATMs, environmental control – from individual, opportunistic systems, and other Internet of Things hackers, to professional and – are all linked together, increasing organised groups of cyber inter-dependencies exponentially. Organisations increasingly open their criminals with strategies for information technology (IT) systems systematically stealing monies to a range of machines and lose direct and intellectual property. control of data security. Furthermore, business continuity, both in society and within companies, is increasingly Philip Whitmore dependent on IT. Disruption to these core processes can have a major Partner – Head of Cyber Security & Financial services organisations impact on service availability. Technology Risk are a prime target for cyber attacks KPMG and management faces the task of ensuring that their organisation Not all organisations are necessarily understands the risks and sets the easy targets for cyber criminals. right priorities. This is no easy task in light of the technical jargon involved and the pace of change. Cyber criminals are very aware of Focusing on technology alone to these vulnerabilities. Driven by a address these issues is not enough. wide range of motivations – from Effectively managing cyber risk pure financial gain, to raising the means putting in place the right profile of an ideology, to espionage or governance and the right supporting terrorism – individual hackers, activists, processes, along with the right organised criminals and governments enabling technology. are attacking government networks with increasing volume and severity. This complexity, however, cannot be an excuse for management to divest responsibility to technical What is true for any financial ‘experts’. It is essential that leaders services organisation is that cyber take control of allocating resources crime risks can be controlled. to deal with cyber security, actively manage governance and decision- making over cyber security, and build But while the cyber threat is very real an informed and knowledgeable and its impact can be debilitating, organisational culture. the media often sketches an alarmist Outlined below are the essential picture of cyber security, creating insights for management to get the a culture of disproportionate fear. basics right: the world of cyber crime Not all organisations are necessarily today, the five common cyber security easy targets for cyber criminals. For mistakes and the critical dimensions example, a small or mid-sized company of a strong cyber security model. has a very different risk profile than that of a multinational organisation.

What is true for any financial services Developing the awareness that Good security starts with developing So, is it useful to keep investing in Reality shows that cyber security Organisations can organisation is that cyber crime risks 100 percent protection against a robust cyber defence capability. increasingly sophisticated tools to is very much driven by compliance. can be controlled. Cyber criminals cyber crime is neither a feasible Although this is generally led by prevent an attack? So is it useful This is understandable because reduce the risks are not invincible geniuses and, nor an appropriate goal is already the IT department, the knowledge to keep investing in increasingly financial services organisations to their business while they can cause real damage an important step towards a more and awareness of the end user is sophisticated tools to prevent attack? have to accommodate a growing to your business, you can take steps effective strategy, because it allows critical. The human factor is and range of regulations. However, it is by building up to protect yourself against them. you to make choices about your remains, for both IT professionals counterproductive to view compliance capabilities in three You may not be able to achieve defensive posture. A good defensive and the end user, the weakest link It is critical for management to as the ultimate goal of cyber 100 percent security, but by treating posture is based on understanding in relation to security. Investment adopt a flexible, proactive and security policy. critical areas – cyber security as ‘business as usual’ the threat (i.e. the criminal) relative in the best tools will only deliver a strategic approach to cyber security. Only a financial services organisation and balancing investment between to organisational vulnerability return when people understand their prevention, detection that is capable of understanding risks and potential impacts, your (prevention), establishing mechanisms responsibilities to keep the systems external developments and incident and response organisation will be well prepared to to detect an imminent or actual breach safe. Social engineering, in which While it is important to keep up-to-date trends, and using this insight to inform combat cyber crime. (detection) and establishing a capability hackers manipulate employees to and to obtain insights into the intention policy and strategy, will be successful that immediately deals with incidents gain access to systems, is still one of of attackers and their methods, it Prevention in combating cyber crime in the (response) to minimise loss. the main risks that financial services is critical for management to adopt The five most common long term. Therefore, effective cyber Prevention begins with cyber security mistakes organisations face. a flexible, proactive and strategic governance and organisation. It The emphasis at most New Zealand approach to cyber security. Given the security strategy should be based on is about installing fundamental To many financial services financial services organisations is often immeasurable value of a financial continuous learning and improvement. measures, including placing organisations, cyber security is a bit of skewed towards prevention – the The world of cyber security is services organisation’s information responsibility for dealing with a mystery. This lack of understanding equivalent to building impenetrable dominated by IT companies that assets and the severe implication Effective cyber security strategy cyber security within the has created many misconceptions walls to keep the intruders out. sell technical products. of any loss to the core business, should be based on continuous organisation and developing among management about how to Once you understand that perfect cyber security strategy needs to learning and improvement. awareness training for key staff. approach cyber security. From our security is an illusion and that cyber prioritise investment into critical asset years of experience, we have seen the security is ‘business as usual’, you Technology cannot help in this regard, protection, rather than the latest following five cyber security mistakes also understand that just as much and it is essential that management technology or system to detect every Detection Financial service organisations need repeated over and over – often with emphasis needs to be placed on takes ownership of dealing with this niche threat. to understand how threats evolve and Through monitoring of critical drastic results. detection and response. After a challenge. They have to show genuine First and foremost, management how to anticipate them. This approach events and incidents, an cyber crime incident, which may vary interest and be willing to study how needs to understand what kinds of is ultimately more cost-effective in the organisation can strengthen from the theft of information to a best to engage with the workforce to Mistake #1: ‘We have to achieve attackers their business attracts and long term than developing ever-higher its technological detection disruptive attack on core systems, an educate staff and build awareness of 100 percent security’ why. An organisation may perceive security ‘walls’. This goes beyond measures. Monitoring and organisation must be able to minimise the threat of cyber attacks. This is often the value of its assets differently the monitoring of infrastructure; it is data mining together form an Reality: 100 percent security losses and resolve vulnerabilities. about changing the culture so that than a criminal. How willing are you about smart analysis of external and excellent instrument to detect is neither feasible nor the employees are alert to the risks and strange patterns in data traffic, to accept risks to certain assets over internal patterns in order to understand appropriate goal Mistake #2: ‘When we invest in are proactive in raising concerns. to find the location on which the others? Which systems and people the reality of the threat and the best-of-class technical tools, we attacks focus and to observe store your key assets, keeping in short, medium and long-term risk are safe’ system performance. Almost every airline company claims Mistake #3: ‘Our weapons have mind that business and technology implications. This insight should enable have developed together and are organisations to make sensible security that flight safety is its highest priority Reality: Effective cyber security to be better than those of the therefore co-dependent on each investment choices. Unfortunately, Response while recognising that there is an is less dependent on technology hackers’ inherent risk in flying. The same other’s security? most organisations do not take a than you think Reality: Your security strategy Response refers to activating a applies to cyber security. Whether strategic approach and do not collect well-rehearsed plan as soon as should primarily be determined and use the internal data available it remains private or is made public, Mistake #4: ‘Cyber security evidence of a possible attack by your goals, not those of to them. almost every financial services The world of cyber security is compliance is all about effective occurs. During an attack, the your attackers organisation will, unfortunately, be dominated by IT companies that sell Financial services organisations need to organisation should be able to monitoring’ impacted by cyber crime. technical products. These tools are ensure that incidents are evaluated in directly deactivate all technology essential for basic security and must Reality: The ability to learn is such a way that lessons can be learned. affected. When developing The fight against cyber crime is an be integrated into the technology just as important as the ability In practice, however, actions are driven a response and recovery Almost every financial services example of an unwinnable race. architecture, but they are not the basis to monitor by real-time incidents and often are not plan, an organisation should organisation will unfortunately be The attackers keep developing new of a holistic and robust cyber security recorded or evaluated. This destroys perceive cyber security as a impacted by cyber crime. methods and technology, and the strategy. The investment in technical the ability of the organisation to learn continuous process and not as a defence is always one step behind. tools should be the output, not the and put better security arrangements in one‑off solution. driver, of cyber security strategy. place in the future.

The same applies to monitoring The six dimensions of Addressing all six of these key attacks. In many cases, financial cyber security dimensions can lead to a holistic cyber services organisations have certain security model, providing the following As management, you want to know monitoring capabilities, but the advantages to any organisation: whether your organisation has an findings are not always shared with adequate approach to cyber security. —— Minimising the risk of an attack on the wider organisation. No lessons, or This involves considering six key an organisation by an outside cyber insufficient lessons, are learned from dimensions that together provide a criminal, as well as limiting the the information received. Furthermore, comprehensive and in-depth view of impact of successful attacks. monitoring needs to be underpinned an organisation’s cyber maturity. by an intelligence requirement. Only —— Better information on cyber crime if you understand what you want to trends and incidents to facilitate Legal and Leadership 1. Leadership and Governance decision making. monitor does monitoring become an Compliance and Governance effective tool to detect attacks. Is the organisation’s leadership —— Clearer communication on the demonstrating due diligence, theme of cyber security, enabling Financial services organisations also ownership and effective management everyone to know his or her need to develop an enterprise-wide of risk? responsibilities and what needs method for assessing and reporting to be done when an incident has cyber security risks. This requires 2. Human Factors occurred or is suspected. protocols to determine risk levels and escalations, and methods for What is the level and integration of a —— Improved reputation, as an equipping the board with insight into security culture that empowers and organisation that is well prepared strategic cyber risks and the impacts ensures the right people, skills, culture and has given careful consideration to core business. and knowledge? to its cyber security is better placed Operations to reassure its stakeholders. andT echnology Human actorsF 3. Information Risk Management —— Increased knowledge of Mistake #5: ‘We need to recruit How robust is the approach to competence in relation to the best professionals to defend achieve comprehensive and effective cyber security. ourselves against cyber crime’ risk management of information Reality: Cyber security is not a throughout the organisation and its department, but an attitude delivery and supply partners?

4. Business Continuity Cyber security is often seen as the Have we made preparations for a Business Information responsibility of a team of specialists security event and do we have the Continuity RMisk anagement in the IT department. This mindset ability to prevent or minimise the may result in a false sense of security impact through successful crisis and and lead to the wider organisation not stakeholder management? taking responsibility. The real challenge is to make cyber 5. Operations and Technology security a mainstream approach. What is the level of control measures This means, for example, that cyber implemented to address identified security should become part of the risks and minimise the impact of boardroom agenda. It also means, compromise? that cyber security should have a central place when developing new 6. Legal and Compliance IT systems, and not, as is often the Are we complying with relevant case with most organisations, be regulatory standards and guidance? given attention only at the end of such projects.

Long-term credit rating Rating and Standard & Poor’s Fitch Ratings Moody’s Investment Registered banks Ultimate shareholding % Standard & Poor’s Moody’s Fitch Ratings Rating Outlook Rating Outlook Rating Outlook Rating Outlook Australia and New Zealand ANZ Bank New Zealand Limited 100 AA- Negative Aa3 Negative AA- Stable Banking Group Limited Avanti Finance Limited BB Stable Commonwealth Bank of BMW Financial Services New Zealand ASB Bank Limited 100 AA- Negative Aa3 Negative AA- Stable A+ Stable A2 Positive Australia Limited96 Australia and New Zealand Australia and New Zealand Credit Union Baywide BB Stable Banking Group Limited – 100 AA- Negative Aa2 Negative AA- Stable Banking Group Limited New Zealand Branch81 Credit Union South BB- Stable Bank of Baroda (New Zealand) EFN (New Zealand) Limited97 82 Bank of Baroda (India) 100 Baa3 Positive BBB- Stable Limited First Credit Union BB- Positive Bank of China (New Zealand) Limited83 Bank of China Limited (China) 100 A Stable A1 Negative A Stable First Mortgage Trust Bank of India (New Zealand) Limited84 Bank of India (India) 100 BB+ Stable Baa3 Positive BBB- Stable Fisher & Paykel Finance Holdings Bank of New Zealand National Australia Bank Limited 100 AA- Negative Aa3 Negative AA- Stable Limited98 China Construction Bank China Construction Bank 100 A Stable A1 Negative A Stable Fuji Xerox Finance Limited99 AA Stable (New Zealand) Limited85 Corporation Citibank, N.A. New Zealand Branch Instant Finance Limited Citigroup Inc. 100 A+ Stable A1 Stable A+ Stable and Associated Banking Group86 John Deere Financial Limited100 A Stable A2 Negative Commonwealth Bank of Australia – Commonwealth Bank of 100 AA- Negative Aa2 Negative AA- Stable Leaseplan New Zealand Limited101 BBB- Stable BBB+ Stable Baa1 Stable New Zealand Branch87 Australia Heartland New Zealand Medical Securities Limited Heartland Bank Limited 100 BBB Stable Limited Mercedes-Benz Financial Services102 A Stable A- Stable A3 Positive Industrial and Commercial Bank of Industrial and Commercial 100 A Stable A1 Negative A Stable Motor Trade Finance Limited China (New Zealand) Limited88 Bank of China Limited (ICBC) Nelson Building Society BB+ Stable JPMorgan Chase Bank, N.A. JPMorgan Chase & Co. 100 A+ Stable Aa2 Stable AA- Stable New Zealand Branch89 Nissan Financial Services NZ Pty A- Positive BBB+ Stable A3 Stable A+ Stable Limited103 New Zealand Post 53 Under NZ Super Fund90 25 Watch review – for Watch ORIX New Zealand Limited104 A- Negative A- Stable Baa1 Stable A+ Stable Kiwibank Limited A+ Aa3 AA Accident Compensation Neg possible Neg Police & Families Credit Union BB+ Stable Corporation (ACC)90 22 downgrade Ricoh New Zealand Limited105 A- Negative AA- Negative Kookmin Bank Auckland Branch91 KB Financial Group Inc. 100 A+ Stable A1 Stable A Stable Toyota Finance New Zealand Limited106 AA- Stable A Stable Aa3 Stable AA+ Stable Rabobank Nederland New Zealand Coöperatieve Centrale 100 A+ Stable Aa2 Negative AA- Stable Banking Group92 Raiffeisen-Boerenleenbank B.A. Watch UDC Finance Limited A- Coöperatieve Centrale Neg Rabobank New Zealand Limited 100 A Stable Raiffeisen-Boerenleenbank B.A. Wairarapa Building Society BB+ Stable Southland Building Society Mutual 100 BBB Stable The Bank of Tokyo-Mitsubishi UFJ The Bank of Tokyo-Mitsubishi 100 A+ Negative A1 Stable A Negative Limited, Auckland Branch93 UFJ, Limited The Co-operative Bank Limited Mutual 100 BBB Stable The Hongkong and Shanghai Banking Corporation Limited, HSBC Holdings plc 100 AA- Stable Aa2 Negative AA- Stable New Zealand Branch94 TSB Bank Limited TSB Community Trust 100 A- Stable Westpac Banking Corporation – Westpac Banking Corporation 100 AA- Negative Aa2 Negative AA- Stable New Zealand Division95 Westpac New Zealand Limited Westpac Banking Corporation 100 AA- Negative Aa3 Negative AA- Stable

Non-bank entity Ultimate shareholding % Non-bank entity Ultimate shareholding % Long-term credit Description of the steps in the Standard & Poor’s credit rating grades for the rating of the long-term rating grades senior unsecured obligations payable in New Zealand, in New Zealand dollars. Various investment/ Mercedes-Benz Financial Avanti Finance Limited 100 nominee companies Services New Zealand Daimler AG (Germany) 100 assigned by Standard & Poor’s BMW Financial Services Limited BMW AG (Germany) 100 New Zealand Limited Motor Trade Finance Various Licensed Motor AAA Extremely strong capacity to meet financial commitments. Highest rating. 100 Limited Vehicle Dealers Credit Union Baywide Various depositors 100 AA Very strong capacity to meet financial commitments. Nelson Building Society Various depositors 100 Credit Union South Various depositors 100 A Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. EFN (New Zealand) EFN (Netherlands) Nissan Financial Services Nissan Motor Co. Ltd 100 100 Limited Cooperatief U.A. NZ Pty Limited (Japan) BBB Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. ORIX New Zealand First Credit Union Various depositors 100 ORIX Corporation (Japan) 100 BB Less vulnerable in the near-term, but faces major ongoing uncertainties to adverse business, financial and Limited economic conditions. First Mortgage Trust Various unitholders 100 Police & Families Credit B More vulnerable to adverse business, financial and economic conditions, but currently has the capacity to Fisher & Paykel Finance FlexiGroup Limited Various depositors 100 100 Union meet financial commitments. Holdings Limited (Australia) Ricoh New Zealand CCC Currently vulnerable and dependent on favourable business, financial and economic conditions to meet Fuji Xerox Finance Ricoh Co. Ltd (Japan) 100 Fuji Xerox Co. Ltd (Japan) 100 Limited financial commitments. Limited Toyota Finance Toyota Motor Corporation CC Currently highly vulnerable. Default has not yet occurred but is expected to be a virtual certainty. Various Private 100 Instant Finance Limited 100 New Zealand Limited (Japan) Shareholders Plus (+) or Minus (-) The ratings AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing Australia and within the major rating categories. John Deere Financial Deere & Company (USA) 100 UDC Finance Limited New Zealand Banking 100 Limited Group (Australia) 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 LeasePlan New Zealand LeasePlan Corporation 100 Wairarapa Building quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to (Netherlands) Various depositors 100 Limited Society adverse conditions. Medical Assurance Medical Securities Assigned by Moody’s Moody’s Investors Service appends numerical modifiers 1, 2 and 3 in each generic rating classification from Society New Zealand 100 Limited Investors Service Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic category, the Limited modifier 2 indicates a mid-range ranking and the modifier 3 indicates the lower end of that generic category. Assigned by Fitch Fitch Ratings applies ‘investment grade’ rates ‘AAA’ to ‘BBB’ to indicate relatively low to moderate credit Ratings risk, while for 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 is to say they are ordinal measures of credit risk and not predictive of a specific frequency of default or loss.

Terms and ratios used Definitions used in this survey John Kensington Jamie Munro in this survey Head of Banking and Finance Partner – Head of Insurance +64 (09) 367 5866 +64 (09) 367 5829 Includes all impaired assets, restructured assets, and assets acquired through the enforcement of security, Gross impaired assets [email protected] [email protected] but excludes past due assets.

Includes loans and advances, lease receivables (net of unearned income) and accrued interest receivable Gross loans and (where identifiable), but excludes amounts due from banks, marketable securities, loans to related parties, advances Ross Buckley Brent Manning sundry debtors and prepayments. Executive Chairman Partner – Audit +64 (09) 367 5344 +64 (04) 816 4513 Gross revenue Includes gross interest income, gross operating lease and net other income. [email protected] [email protected] Impaired asset The charge to the Profit and Loss Account for bad debts and provisions for doubtful debts, which is net of expense recoveries (where identifiable). Godfrey Boyce Paul Herrod Interest bearing Customer deposits (including accrued interest payable where identifiable), balances with banks, debt Chief Executive Officer Partner – Audit liabilities securities, subordinated debt and balances with related parties. +64 (04) 816 4514 +64 (09) 367 5323 [email protected] [email protected] Cash on hand, money on call and balances with banks, trading and investment securities, net loans and Interest earning assets advances (including accrued interest receivable where identifiable), leased assets net of depreciation and balances with related parties. Graeme Edwards Gary Ivory Interest expense Includes all forms of interest or returns paid on debt instruments. National Managing Partner – Audit Partner – Corporate Finance +64 (04) 816 4522 +64 (09) 367 5943 Difference between the average interest rate on average interest earning assets, and the average interest Interest spread [email protected] [email protected] rate on average interest bearing liabilities.

Net assets Total assets less total liabilities. Jack Carroll Ceri Horwill Net interest income Interest income (including net income from acting as a lessor) less interest expense. National Managing Partner – Advisory Partner – Advisory +64 (04) 816 4516 +64 (09) 367 5348 Net interest margin Net interest income divided by average interest earning assets. [email protected] [email protected] Net loans and Loans and advances, net of provision for doubtful debts. advances Ross McKinley Philip Whitmore Includes all expenses charged to arrive at net profit before tax (excluding interest expense, impaired asset National Managing Partner – Head of Tax Partner – Head of Cyber Security & Operating expense expense, subvention payments, direct expense related to other income (where identifiable), depreciation of and Property Technology Risk leased assets where a lessor, and amortisation of goodwill and other intangibles (including software). +64 (09) 367 5904 +64 (09) 367 5931 [email protected] [email protected] Net interest income, net operating lease income and net other income (where direct expense related to Operating income other income is identifiable). Kay Baldock Rachel Piper Includes any asset which has not been operated by the counterparty within its key terms for 90 days and Past due assets Partner – Head of Financial Services Partner – Tax which is not an impaired or restructured asset. +64 (09) 367 5316 +64 (09) 363 3525 [email protected] [email protected] Provision for doubtful Includes both collective and individual provisions for bad and doubtful debts. debts

Total assets Excludes goodwill assets (unless specifically defined). Matthew Prichard Bruce Bernacchi Partner – Head of Funds Management Partner – Tax Ultimate shareholding Identifies the ultimate holding company rather than any intermediate holding companies. +64 (09) 367 5846 +64 (09) 363 3288 Operating income less operating expense and impaired asset expense. Items of a non-recurring nature, [email protected] [email protected] Underlying profit unrelated to the ongoing operations of the entity, are excluded.

Definitions for operating income and operating expense have been adjusted in the current year to provide further clarity as to the calculation of these figures. In certain circumstances, direct expenses relating to other income have been reallocated from operating expense to operating income to ensure consistent presentation of income comparatives between entities. This would subsequently affect the calculation and analysis of performance ratios that are being driven by these figures.

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