Profits still falling, say banks

BNZ chief executive Andrew Thorburn

Bank profits have fallen during the recession, BNZ chief executive Andrew Thorburn says, despite politicians arguing interest rate cuts have not been passed on to New Zealand customers.

Reserve Bank Governor Alan Bollard announced on Thursday the official cash rate (OCR) would stay at 2.5 per cent.

"Despite the fact that we kept rates on hold this week we do still believe there is room for banks to cut their short term rates, bearing in mind that they haven't moved since our last 50 basis point cut in the April OCR review," Dr Bollard said.

On Tuesday, in a select committee report, MPs lashed out at banks for failing to reduce mortgage rates, for protecting their profits, and, in the case of Australian institutions, for treating New Zealand firms differently.

Finance Minister Bill English said "taxpayers are supporting the banks, and we want the banks to be able to demonstrate that they are going to support businesses and households through a tough time in the economy, even if it affects their profits a bit".

Thorburn said his bank's profits had fallen and the cost of sourcing money overseas remained high.

"We don't just fund the bank from the OCR."

The OCR was a "useful indicator" but BNZ raised funds from domestic deposits and 40 per cent from offshore funds.

"Around the world there's a lot of uncertainty, and investors are wanting to get a higher return and we're having to pay for that."

BNZ's net interest margin fell 26 basis points to 2.23 per cent in the past six months, Thorburn told TV1's Q+A show.

BNZ pays $350 million in wages, $300m in taxes and $200m to other suppliers.

"So there's a billion dollars before we get our profit that's washing around the economy."

The New Zealand banking system was one of the most stable in the world, he said.

Labour finance spokesman David Cunliffe said if the increased provision for bad debts was taken out of banks' profitability in the past six months profitability for bank lending was going up.

"Now that doesn't seem appropriate in a recession where ordinary New Zealanders an businesses are suffering."

Dr Bollard had powers under the Reserve Bank Act he could use if he was not satisfied cuts were being passed on, Cunliffe said.

"The stability and strength of the banking sector in new Zealand is a good thing... but it cannot be an excuse for failing to pass on to struggling householders and businesses, cuts to short term interest rates."

- NZPA