Softer loan growth and narrower interest rate margins have combined with a gloomy business outlook to keep retail banks’ profits in check.

Advisory firm KPMG’s survey of financial institutions for the June quarter shows the sector’s net profit fell close to half a percent to $1.45 billion, a fairly flat result after a near 9 percent increase in the previous three month period.

KPMG’s head of banking and finance John Kensington said banks could not be expected to reach new profit levels every quarter.

“To get large profit growth for the banks, you need to have strong loan growth, and loan growth this quarter was 1.2 percent, or you need to have an improvement in margins and they didn’t have that either,” he said.

Caution in the wake of the 2018 bank conduct and culture review, and the looming RBNZ decision on increased capital requirements for banks were also factors.

“Confidence is not that great in the market at the moment and we’re kind of in winter at the moment so it didn’t surprise me that it was flat.

“We’re probably luckily to have not have seen it go backwards to be honest,” Kensington said.

The Reserve Bank’s surprise 50 basis point cut in August, which took the Official Cash Rate down to 1 percent, presented an opportunity for banks to lock in cheaper wholesale funding.

Kensington said both Westpac and ASB had locked in wholesale funding at lower rates, which could mean discounted lending rates in time for Spring.

“They’ve both raised significant amounts … of offshore funding, one’s at around just over 2 percent and one is just over 2 percent and that’s got to mean they’re potentially able to lend those out into the mortgage market at rates lower than the rates that we’re currently seeing.”

Kensington said it would be interesting to see whether those lower rates acted as enticement, offsetting the cautious approach businesses and households had taken to borrowing.

This article was originally published on RNZ and re-published with permission.

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