Financial Institutions Performance Survey FIPS Banks – Review of 2019 1 3.93% 0.99% escalation in decrease in NPAT operating expenses 8 2 10.85% 3 4.79% rise in net increase in provisions interest income 2 bps 4 5.37% decrease in net increase in interest margins gross lending 7 5 8.91% 6 11 bps rise in gross drop in average impaired assets funding costs Contents 2 The Survey 4 A KPMG view from the editor 8 Industry overview 20 Timeline of events 22 Sector performance 32 Analysis of annual results 40 Major banks: Quarterly analysis 44 Capital adequacy: The bar is set higher 50 Cultural takeaways: Lessons from financial services in China 52 Tax governance and compliance: The new certainty 54 FMA: Looking forward to a year of consolidation and change 56 NZBA: Conduct, culture and capital 58 CoreLogic: Review of property banking in 2019 60 Massey: Banking industry review and forecasts 66 Ownership and credit ratings 67 Descriptions of the credit rating grades 68 Definitions 69 Endnotes 71 KPMG’s Financial Services Team 72 Contact us KPMG’s Financial Services team provides focused and practical audit, tax and advisory services to the insurance, retail banking, corporate and investment banking, and investment management sectors. Our professionals have an in-depth understanding of the key issues facing financial institutions. Our team is led by senior partners with a wealth of client experience and relationships with many of the market players, regulators and leading industry bodies. 2 | KPMG | FIPS 2019 The Survey The KPMG Financial TABLE 1: ENTITY MOVEMENTS1 Institutions Performance Who’s out Who’s in Survey (FIPS) report of 2019 — Bank of China (NZ) Banking represents the 33rd year that Group Banks: 26 — Nil KPMG has provided in-depth — China Construction Bank (NZ) insights into New Zealand’s Banking Group banking sector. In this 33rd edition we will be presenting In late 2019 we published and We wish to thank the survey launched our FIPS Non-bank – Review participants for their valued industry commentary and of 2019 publication. This publication contribution, both for the additional analysis on the performance can be accessed at the following information provided and for the time link: https://home.kpmg/nz/en/home/ made available to meet and discuss of the New Zealand registered insights/2019/12/fips-non-bank-2019. the industry issues with us. Massey banks, together with a range html University continues to be a partner and key contributor to the compilation of topical articles from other There have been two changes to the of this publication, assisting with the survey participants this year, with key stakeholders such as data collection, as well as drafting the the inclusion of the Bank of China industry experts, regulators banks’ profit forecasting section of New Zealand Branch and the China this survey. We thank them for their and our own business leaders. Construction Bank New Zealand continued contribution. Branch, each with a 31 December 2018 balance date, each now dual- External contributors continue to registered banks. As with other play a vital role in our publication, The FIPS publication covers registered dual-registered banks, we will present providing insight on key issues and bank entities with balance dates the results of the New Zealand developments that we might not between 1 October 2018 and banking group for both Bank of China otherwise have. We would like to 30 September 2019. As a result, New Zealand and China Construction acknowledge the contributors from registered banks with the balance Bank New Zealand. the Financial Markets Authority (FMA), New Zealand Bankers’ Association date of 31 December have had their As with all previous FIPS publications, (NZBA) and CoreLogic for their 31 December 2018 financial results the information used in compiling our exceptional contribution towards the included in this year’s survey as their analysis is extracted from publicly compilation of this publication. most recent results. This includes Bank available annual reports and disclosure of China, China Construction Bank, statements for each organisation, with We have supplemented their external Citibank, Industrial and Commercial the exception of certain information thought leadership commentary with Bank of China, JPMorgan Chase provided by the survey participants. some of KPMG’s own business line Bank, Kookmin Bank, Rabobank and The results only include operations thought leadership. We trust you find The Hongkong and Shanghai Banking within the respective banks or banking the content of this survey of interest. Corporation. groups, so any operations within the wider group, but outside of the registered bank or banking group, such as with Kiwibank and Heartland, will not be included. © 2020 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. FIPS 2019 | KPMG | 3 © 2020 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4 | KPMG | FIPS 2019 A KPMG view from the editor FIPS Banks – Review of Since the final decisions were released in December 2019, it has 2018 ’s key themes were been fairly quiet from the banks – a summarised as the 3 C’s: stark contrast from the views being Capital, Conduct/Culture, and expressed by some banks and banking commentators during the consultation confidence. These continue to period. This is likely driven partly by be some of the main themes an acceptance that these are now in the FIPS Banks – Review the rules and nothing can be done except to prepare for them to become of 2019 publication. This year effective, partly that banks don’t need also sees more discussion another reason to face a potential regarding fintech/disruption, public backlash by appearing to care just about margins when the changes the changing customer, and a aim to make the banking system safer, skill shortage in the banking and partly that no bank wants to attract the attention of the RBNZ in a time John Kensington sector and wider economy. when many banks are being stung, Partner – Audit publicly, both here and in Australia, by Head of Banking and Finance other control failures such as capital KPMG calculation issues and Anti-Money Bank capital was the most frequent Laundering (AML) issues. In addition, headline during 2019, and main topic banks are looking to rebuild the John has been with KPMG’s Financial of discussion with survey participants. public trust. Services audit team for over 33 years, 2019 saw the consultation period end, One thing that will determine how 21 of these as a partner working with continued discussion in the sector, a wide range of financial services successful these capital changes will external experts assess the proposed be is how the banks, individually and audit clients, specialising in banks and capital changes, and a final set of finance companies. as a sector, respond to these changes decisions released early December. over the next few years. An outcome John has a wealth of experience in The final decisions have been best that is suggested by many is that to auditing and accounting for banking received by the smaller banks, achieve the new capital requirements, products and services including who are happy that their minimum the banks will, amongst other things, treasury, retail offerings, corporate requirements will be less than that likely review their books, client by loans and loan provisioning. He is of the big four banks, and that a cap client, and reassess and reprice risk, currently Head of KPMG’s Banking has been set to limit the benefits the with the possibility of credit rationing. and Finance team and editor of this big banks get by using an internal For riskier clients in particular, rates publication. John is also Deputy ratings-based capital method. In effect will likely increase and loan covenants Chairman of the New Zealand they welcome this as a levelling of may become more restrictive, or in Auditing and Assurance Standards the playing field. However, both big more severe cases the bank may Board (NZAuASB) and serves as a and small banks are pleased that the discontinue funding. Deposit rates board member of the XRB. John is Reserve Bank of New Zealand (RBNZ) will likely reduce further; however, also a fellow of CA ANZ, a member took some submitter’s concerns into there is likely to be a floor in these of the Institute of Directors and a consideration, in particular the RBNZ rates as there will be certain levels of Trustee of Breast Cancer Cure. increased the implementation period rates where term deposit investors and indicating they would allow a will start looking for another home for lower form of capital, Additional Tier 1 their money in large droves, which will (AT1), to be used to meet minimum reduce available funding for the banks. requirements (conditional on obtaining RBNZ approval). © 2020 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. FIPS 2019 | KPMG | 5 There will be limited scope for This year has been relatively benign Part of the issue is when the business banks to reduce their operating in respect of headlines, with the life survey comes in, things like the expenses, given there have already insurers bearing most of the brunt of increased fuel tax and minimum been a few non-compliance issues regulator and media scrutiny in 2019 wage come to mind and both cause (in New Zealand and across the due to the release of the results of business expenses to rise.