KPMG suggests if the RBNZ does impose restrictions on high LVR home loans, banks will find ways around them

By Gareth Vaughan

Banks will probably find a way around any Reserve Bank restrictions imposed on their high loan-to-value (LVR) residential mortgage lending, KPMG's head of financial services John Kensington suggests.

The Reserve Bank has said it's "seriously considering" using macro-prudential tools to help moderate house price inflation pressures, with restrictions on high LVR loans the tool with the best scope to dampen the current strong demand for housing, as well as reduce risk to bank balance sheets.

Kensington says if the Reserve Bank does follow through and implement LVR restrictions, banks will probably find a way around them.

"While it's not to be commended or condoned in any way, I'm sure that there will be ways found around it," said Kensington.

He said all the banks are "very confident" the high LVR lending they've done themselves is justified.

"Equally quickly they point the finger and go 'we know the other banks are doing it and they're being reckless.' It's quite pointed that. And what one bank might think is reckless might not be because what it might be is that a bank has got the guy's two rental properties but not his home, so they're prepared to do his new home and there's adequate security," said Kensington.

If banks are forced to hold more capital against high LVR loans, they've got enough capital to carry on writing such loans for the time being, he added.

Kensington was speaking as KPMG released its latest Financial Institutions Performance Survey (FIPS), this one for the March quarter. It shows net interest margins across the sector down four basis points to 2.24%. Although funding costs have fallen, KPMG says this has been outweighed by a drop in the banks' return on interest bearing assets.

Kensington expects margins to either hold steady, or drop slightly lower through the balance of 2013.

"I think you've got two factors at play and it depends which one drives it the most. Lending, or borrowing, is incredibly  competitive. Everyone's looking to do the best rate they can to keep customers and get new ones. A little bit of pressure has come off the funding. So it's which one has the biggest impact," said Kensington.

"So I would be thinking that interest margin would stay about stable or maybe just squeeze down a little bit more."

In its previous quarterly FIPS report KPMG said average bank funding costs had fallen to a five-year low of 3.80%. Kensington said in the March quarter they fell further, to 3.72%.

Across the nine banks surveyed by KPMG, total net profit after tax rose 13% in the March quarter from the December quarter,  to $971 million. 

"This was driven by an increase in non-interest income and a decrease in operating expenses and impaired asset expense. The non-interest income increase is largely a result of favourable fair value movements in certain survey participants, a trend we also saw in the prior quarter," KPMG said.

In terms of gross loans, TSB and BNZ recorded the strongest quarterly growth of 1.87% and 1.66%, respectively. Over the year to March, however, the Co-operative Bank and Commonwealth Bank of Australia - predominantly ASB - grew the most, by 6.38%, and 5.84%, respectively.

In terms of the banks' operating expenses to operating income ratio, the average for the sector dropped by 2.82% to 43.69% and is now down from 50.79% as recently as the September quarter last year.

*The charts above are taken from the KPMG report.

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