New Zealand’s expected interest rate hike to raise banks’ profits: Fitch

However, its impact on earnings may take some time to rise as mortgages are not yet due.

Banks in New Zealand are expected to benefit positively from an expected interest rate hike by the central bank after its meeting on 18 August, according to a report by Fitch Ratings.

“We expect the Reserve Bank of New Zealand (RBNZ) to begin raising interest rates at its meeting on 18 August. Higher rates may be positive for banks' profitability and earnings due to increased returns on bank assets, particularly loans,” the ratings agency wrote in a report. 

Rate increases will likely reduce the compression of net interest margins that tend to be seen at ultra-low interest rates, the agency added.

However, the positive earnings impact from the rate hikes may take some time to flow through. The majority of New Zealand banks' residential mortgages are on fixed rates, and they are not due to end until at least a few more months.

On the other hand, the rate hikes could encourage lenders to increase traditional lending and reduce liquid asset holdings, although the higher cost of borrowing will also affect demand for credit. 

In other sectors, Fitch forecasts business lending to pick up as well amidst strong economic conditions, which in turn should encourage more borrowing for investment.

Deposit growth is expected to be moderate in the near term despite on-call deposits growing considerably over the last 12 months due to the strong liquidity support provided by the RBNZ.