Banks post record profits and edge closer to $5 billion in interest income as mortgage costs soar

The total interest collected by banks from households and businesses is on track to top $5 billion a quarter as interest rates on home loans rise, according to KPMG.

Rising mortgage rates are contributing to a national cost-of-living crisis, and data from Reserve Bank Te Pūtea Matua showed in late April that just under $110 billion in home loans would come due before April. next year.

Borrowers who reprice over the next three or six months will likely get rates starting at 5% or 6%, said John Kensington, head of banking and finance at KPMG.

“Probably a third of people have re-fixed their loans. There are still two-thirds to go through this process,” he said.

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KPMG’s quarterly survey of bank finances shows that in the first quarter of the year, banks posted record profits.

They had combined interest income of $4.6 billion, down from $4.1 billion in the third quarter of last year, and looked set to top $5 billion.

The country's interest bill on mortgages and other loans is rising at an alarming rate as billions of dollars in home loans need to be repriced at higher rates.

Sungmi Kim / Stuff

The country’s interest bill on mortgages and other loans is rising at an alarming rate as billions of dollars in home loans need to be repriced at higher rates.

“I will be very interested to see the results for the next quarter,” Kensington said.

“I could see it getting closer to that $5 billion, if not slightly above it,” he said.

And the next quarter, it could go even higher.

As painful as crossing the $5 billion mark will be for households, it’s territory they’ve been in before, according to the data.

In early 2020, before Covid hit the country, banks were collecting over $5 billion in interest a month, but the Reserve Bank then cut interest rates in a bid to avoid a recession and an unemployment crisis.

Kensington said the Reserve Bank’s struggle to fend off a possible Covid recession had poured a lot of money into the system.

“That money has to come out of the economy,” he said.

John Kensington, head of banking and financial services at KPMG, says many home borrowers will soon re-fix parts of their home loans and face significantly higher interest rates.

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John Kensington, head of banking and financial services at KPMG, says many home borrowers will soon re-fix parts of their home loans and face significantly higher interest rates.

Banks posted another record quarterly profit in the first three months of this year, Kensington said, with an 8.08% increase in net profit after tax to $1.74 billion.

Banks cut costs and increased credit spreads, KPMG reported.

The introduction of stricter responsible lending regulations may have contributed to bank customers becoming “stickier” and less willing to switch between banks after better deals, said Kensington.

Banks’ loan portfolios have continued to grow at a rate of around 5% a year, which should allow their streak of record profits to continue, Kensington said.

But “I don’t think our banks are making super profits,” he said.

It’s not just the higher household interest bill that makes for worrying reading. KPMG identified a slight increase in bad debts, indicating an increase in the number of borrowers in financial difficulty.

Kensington said the growth in banks’ loan portfolio could reflect not just new lending, but also a slowdown in borrowers repaying their loans faster than banks require.

And after a period in which many people paid off their credit cards, card debt started to rise again, Kensington said.

It could be a sign of pressure on household budgets, Kensington said.

Economists forecast

Christel Yardley / Stuff

Economists forecast “anemic” growth in retail spending this year as households are squeezed by rising prices, high fuel prices and rising mortgage rates.

“I think if you have a bank line of credit right now, don’t give it up because getting it back might be more difficult,” he said.

The cost of living crisis came at a time when households wanted to get out and see the world, Kensington said.

“Someone who might have had $1,000 in salary left over each month, now might have less because of fuel prices and rising interest rates, and that comes at a time when they want to travel and do something else,” he said.

It also hurt confidence to spend.

The Westpac McDermott Miller Consumer Confidence Index fell to its lowest level since the survey began in 1988, and Westpac’s acting chief economist, Michael Gordon, said: “With rates of interest which are expected to increase further, many households will see the pressure on their finances become more intense in the coming months.

A Westpac survey of 1,600 of its customers in April found that 58% had already tightened their belts to cope with inflation and rising mortgage rates.

Restaurant meals and takeout were cut from many budgets, and people were spending less on groceries, the survey found.