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Banks likely to wind back lending

NZ Newswire logoNZ Newswire 15/02/2017 Paul McBeth

New Zealand banks are likely to wind back the pace of new lending this year.

It comes after a margin squeeze caused by higher capital requirements for the big four Australian-owned banks and greater use of more expensive wholesale funding weighed on lenders' profits last year.

The country's licensed lenders grew their loan books at the fastest pace in eight years in 2016, with $393.6 billion of loans and advances as at December 31 from $364b a year earlier, according to KPMG's financial institutions performance survey.

Still, skinnier net interest margins of 2.18 per cent compared with 2.28 per cent a year earlier, meant net profit fell 6.5 per cent to $4.84b across the sector.

While customer deposits rose 8.1 per cent to $287.5b, it wasn't big enough to fund the credit expansion and lenders turned to more expensive wholesale funding lines overseas.

Bank executives spoken to by the report's authors say the more expensive wholesale funding will be compounded by increased lending restrictions and capital requirements imposed on the big four Australian-owned banks' parents.

That's expected to "slow lending growth in the upcoming year," the report said.

In 2015, New Zealand's lenders reaped their biggest margins in nine years in a period of strong lending growth, primarily in the residential and agricultural sectors.

Since then banks have become more wary about the rural sector after a slump in dairy prices.

At the same time, the property market has slowed down after the Reserve Bank imposed new curbs to cool investor demand and the lenders themselves adopted tougher criteria.

The banks' executive said they faced a "tough predicament" in the public eye over interest rates when the Reserve Bank lowered the official cash rate last year.

They were unable to reduce deposit rates due to a decline in the volume of deposits because of already low rates, and at the same time they could not reduce home loan rates any further as they were already under margin pressure.

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