Excessive bank profits grow fatter

Six retail banks have been making what a bank industry academic calls excessive profits, and Taranaki-based TSB Bank, the only New Zealand-owned bank, is leading the way.

David Tripe of Massey University's Centre for Banking Studies said the fact that the locally owned TSB was earning the most profits was important because of the debate over Alliance leader Jim Anderton's proposal to establish a government-backed bank offering lower fees.

TSB, owned by a community trust, made an aggregate return on assets of 1.5 per cent in the September quarter, slightly better than the 1.41 per cent return by the next most profitable bank, WestpacTrust.

Fifteen months ago, Mr Tripe said bank profits were verging on excessive with an average aggregate rate of return of 1.16 per cent.

If they stayed at that level for another year, he said, then returns could be labelled excessive.

Asked if the banks' profitability now was excessive, he said: "I guess it would be hard to argue against that. I haven't bothered to repeat that allegation this time round but it does rather look that way.

"They seem to be making super profits."

Average returns on assets of the six banks over the September quarter were 1.18 per cent and profits have now been above 1 per cent for eight successive quarters.

Mr Tripe said there were questions about whether banks were abusing their power.

The high profitability of TSB meant he had to struggle to find any reason foreign ownership mattered.

"There is no sign from these figures to say you have to be foreign owned to wind up making big profits, and also the foreign owned banks don't make any bigger profits than the New Zealand owned bank."

Mr Tripe said TSB had a competitive marketing advantage because of its local ownership but he doubted that that was behind the higher profitability.

TSB had a significantly lower cost of funds with nearly all of it retail. Other banks partially funded from the wholesale market.

Its average cost of funds was almost 1 percentage point lower than other banks.

Mr Tripe suggested that the range of products offered might also be behind TSB's profitability. For example, TSB paid interest on its fee-free cheque account only once a year and it was calculated on the minimum monthly balance.

Westpac, owner of WestpacTrust, was earning a greater return in New Zealand than in Australia but returns generally were on a par with Australian returns.

Mr Tripe said the super profits were being made because banks had so few bad debts.

Asked if the low bad debt ratios meant the banks were too averse to risk, he said it would be easy to reach that conclusion but it was hard to prove.

Mr Tripe had a number of questions about the viability of Mr Anderton's Kiwi Bank proposal, which is expected to go before the cabinet this month.

He said it was hard to see how the bank would cover processing costs, especially if it was going to undercharge the other banks. If it was going to engage in lending activities, then it would inevitably be landed with a lot of high risk business.

It was also unclear how the bank's business objectives would relate to any social objectives it was set.

There were undoubtedly problems with the banking system that meant people on low incomes were being charged high fees, but he believed such problems could be solved in other ways.

"I'm not sure that the Kiwi Bank would solve that problem particularly effectively."

- NZPA