KPMG survey positive for financial sector

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The mortgage market will continue to be intensely competitive this year but interest margins should remain stable, says KPMG's latest survey.

Tuesday, May 4th 1999, 12:00AM

by Paul McBeth

The mortgage market will continue to be intensely competitive this year but interest margins are likely to remain stable, according to the latest survey of KPMG's New Zealand financial institutions' performance.
In launching the 13th annual survey, Chairman of KPMG's Banking and Finance Group Andrew Dinsdale said that given improving business confidence, a stable interest rate environment and a relatively stable currency, "we consider there will be continued growth in lending and higher levels of profitability this year".
It's good news for the customer too, as KPMG believes that interest margins will continue to be squeezed as non-banks compete with the registered banks for business. In fact, the weighted average interest margin last year was the lowest the survey has tracked yet, falling from 2.76% in 1997 to 2.58% and showing the highly competitive nature of this market.
Other related findings:

• The non-bank sector of the mortgage market expanded last year, thanks to the entry of Australian securitisation firms, increased 'legitimacy' (with Sovereign and AMP/Ergo having been established two years) and more customer acceptance of mortgage brokers.

• Mortgage brokers originated some 17% of mortgages during 1998, well up on the estimated 7% in 1996. Although the industry is growing considerably in New Zealand, the use of brokers is still low by Australian and United States standards (30% and 50% of mortgage originations respectively).

• KPMG says brokers have become attractive to customers who are disillusioned with their banks and a trend is also developing for brokers to have a significant influence on where customers take their business. Meanwhile, some banks that have traditionally shunned mortgage brokers are now paying commission and entering into alliances with them.

• Customer relations also came under the spotlight, with KPMG saying that for many customers, their relationship with their financial institution is "tenuous, based more on apathy and inertia than on loyalty". KPMG says as customers are increasingly willing to switch providers, financial institutions will have to deliver a much higher level of satisfaction to retain them.

• Many borrowers repaid their fixed interest loans early, thanks to a sharp fall in interest rates from the second half of 1998. KPMG says the repayment penalties should boost fee income for institutions in the short term "but result in significant income losses in the next few years".

KPMG also commented on the number of mergers and acquisitions in the financial industry and said the market in which banks compete has become the financial services sector rather than the banking sector. However, further rationalisation will depend on events outside New Zealand, in particular the Australian regulatory environment.
The survey ranks banks according to eight criteria, which include financial performance and efficiency. Of the major banks, WestpacTrust moved into first place in this year's survey ahead of BNZ and ASB Bank. As a sector, the registered banks improved profitability 17.8%.

Paul is a staff writer for Good Returns based in Wellington.

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