Banks reap profits in continuing healthy run

Five out of six of New Zealand's main retail banks have earned above-average profits for their 11th consecutive quarter, says a Massey University report.

Massey banking studies lecturer David Tripe has been monitoring banks profits against a benchmark 1 per cent return on assets.

His figures show that in the June quarter, the aggregate return on assets was 1.22 per cent, up from 1.21 per cent in the previous quarter. The average return on equity was 26.15 per cent.

Two years ago Mr Tripe noted profits were very high and said then that if returns on equity did not fall over the next year, it would be fair to say they were excessive, raising suspicions that the mostly foreign-owned banks were abusing their dominance in the market.

Yesterday he was reluctant to say their profits were too high because they were enjoying "a very good run with their bad debts", a situation that could change with an economic slowdown.

Lower operating costs over the last few years were "undoubtedly" another major factor in the banks' strong profitability, he said.

The average cost-to-assets ratio for the banks with predominantly retail business in the June quarter of 1997 was 2.71 per cent. This year the ratio was 1.67 per cent.



"In dollar terms, banks' costs have decreased by a mere 9 per cent over the four-year period, whereas assets have increased by 45 per cent," he said.

But the entry of the "People's Bank" to the market in the first quarter of next year might put some pressure on profit margins.

Operating costs could also rise if there was an economic downturn, which usually reduced loan growth and increased the level of problem assets.

Impaired assets belonging to New Zealand-registered banks had risen significantly over the last couple of quarters, by $561 million.

Mr Tripe said most of the increase ($449.7 million) belonged to HSBC and Citibank, which might be a reflection of their exposure to the failed Central North Island Forestry Partnership.

He was intrigued at why no other New Zealand banks were reporting increased levels of impaired assets, a possible reason being that the other banks involved in the forestry partnership deferred to their Australian parents.

The only bank which earned less than the 1 per cent benchmark profit was the ASB and Mr Tripe said that could be because of increased tax.

All but one of the banks in the survey are foreign-owned.

He said 16 banks were registered in New Zealand with the six biggest accounting for 83.1 per cent of the country's total banking assets.

- NZPA