Editorial: Market study needed to resolve questions over banking profits

The four Australian-owned banks make the lion's share of the profits in the banking sector in New Zealand. Composite image / File

EDITORIAL

There’s no doubt that banks make a lot of money in New Zealand and the big four Australian-owned banks make the lion’s share of that profit.

Reserve Bank figures show the 15 largest banks made more than $1.8 billion in just the three months to December last year, of which ANZ, ASB, BNZ and Westpac made $1.67b. In 2022, the sector as a whole made more than $7 billion.

But whether it is too much and the driver for the excess profits is due to a lack of competition in the market is unclear. Bank margins - the difference between what they charge borrowers on loans and pay out in interest on deposits have widened markedly in the last year.

Illustration / Rod Emmerson

According to data collected by the Reserve Bank, banks’ net interest margin rose by 6 basis points, to 2.37 per cent, in the final three months of 2022.

The margin last reached this level in December 2014 and the last time it was higher was in June 2006, when it hit 2.50 per cent.

That has prompted comments from Reserve Bank Governor Adrian Orr that deposit interest rates should be higher.

But, by other measures, bank profitability levels were stable in the December quarter at pre-Covid levels. Banks’ return on equity was 12.9 per cent and return on assets 1.1 per cent.

Sam Stubbs, a former banker turned critic, has been calling for an inquiry into the sector since 2018 when Australia’s Royal Commission found widespread conduct issues across the sector.

That review didn’t address competition issues or profitability and a follow on review by New Zealand’s own regulators subsequently found pockets of conduct and culture issues that needed addressing here but it was not a systemic problem.

Three years after the onset of the Covid pandemic, the optics are very different. Banks are making record profits while borrowers are facing a cost of living crisis as mortgage rates rise at the fastest pace in history even as the cost of everything else is rising too.

Last year former prime minister Jacinda Ardern called for banks to assess their social license to operate. Now the National Party has called for a select committee inquiry into bank profits.

Finance minister Grant Robertson has said he isn’t keen on having a “quick and dirty inquiry” and a decision had not been made yet on whether a Commerce Commission market study should be undertaken.

A market study would take longer but would also be more thorough and would take the political heat out of it.

Given there is public appetite for a look under the hood at bank profits and political will across the spectrum - albeit with divisions over the style of investigation - it would seem sensible to commit to a banking market study.

The banks will argue there is plenty of competition. And, yes, there are 27 registered banks in New Zealand. However, it appears to manifest as more of a cosy quadropoly than a highly competitive market.