Those wanting lower bank profits should be careful what they wish for

Watching politicians jump on a bandwagon can be an unedifying sight.

Both Finance Minister Bill English and Labour Finance Spokesman David Cunliffe took a running leap yesterday and jumped onto the bank-bashing bandwagon parked outside the Beehive earlier in the day by Reserve Bank Deputy Governor Grant Spencer.

English and Cunliffe said the banks' annual profits of around $4.5 billion were too high and they should reduce them to give consumers a 'fair go'. Cunliffe went further to say banks needed to be more responsible and English said the banks 'owed' the public because of the government guarantees granted to the banks.

This circling of the band wagons has been brewing for a few weeks. The 50 basis point cut in the Official Cash Rate on April 30 was met with an ominous silence from the major banks, who refused to cut their variable mortgage rates. There has been a few nips and tucks in some short term fixed mortgage rates, but this OCR cut was the first where the banks effectively ignored it for both term deposits and mortgages.

Naturally, people who broke their fixed mortgage rates in the hope of getting 'automatic' cuts in their rates when the OCR was cut are grumpy. And there's nothing easier for politicians to kick than a bank when it seems to be profiteering at the expense of consumers.

So the scene was set yesterday when Spencer came prepared to the press conference releasing the bank's latest Financial Stability Report. When asked directly about bank margins and the reaction to the April 30, he said he was disappointed and wanted the banks to be more competitive, particularly for floating mortgage rates.

But he did give the banks some wiggle room.

"It's fair to say we have been disappointed with the response to date, but the OCR-retail rate relationship is not a precise one. Sometimes the lags are long and there are other factors affecting the actual mortgage rates other than the OCR and we have to acknowledge that," Spencer said.

"We may see further reductions in mortgage rates as some of those other conditions in the markets change. We're not considering at this point changing our policy approach or introducing any unconventional instruments that we have seen in other countries."

However, these comments gave the politicians the green light to take the bigger leap.

Asked by journalists after Spencer's comments what he thought of banks not passing on the rate cuts while making $4.5 billion in profits in the last year, Finance Minister Bill English was quoted as saying: "I think it would help the banks if they explained fully to their borrowers just why interest rates are at the level they are at."

"It [NZ$4.5 billion] is a big profit and we would expect that in the next financial year they will be less profitable," he said.

"We've made it clear right through with the banks that with taxpayers supporting them and their depositors and their overseas borrowings, we expect that they will give borrowers a fair go."

But are banks really profiteering and do we really want them to cut their profits?

The Reserve Bank looked at this in its Financial Stability Report and found the overall net interest margin charged by banks as a percentage of assets had fallen to 2.13 per cent by December from 2.31 per cent two years earlier, but was up from a low of 2.08 per cent in the September quarter of last year. Total profits have also fallen from a high of NZ$4.92 billion in the year to the March quarter of last year to NZ$4.49 billion in the year to the December quarter.

We do have more recent data directly from three of the four big banks. Westpac's margins rose slightly in the March quarter, while ANZ National and BNZ's margins fell in the March quarter.

Bank net interest profit margins are generally falling, not rising. That's because they have much more expensive international funding costs and cannot pass on the OCR cuts to term deposit rates. New Zealand savers simply will not tolerate it.

The bank profiteering charge is just not true. But they are making profits and English is saying they should make less profits.

I think he should be careful what he wishes for.

One of the reasons New Zealand's recession has been relatively mild compared to those in Europe, the United States, Japan and the UK is our banks are profitable and have not stopped lending in the wake of the global credit crunch, unlike their counterparts up north.

Our banks should remain profitable, but I think Spencer has a point when he says the banks need to be more competitive in the variable mortgage market. Banks should stop subsidising 1 and 2 year fixed rate mortgages with relatively high floating rates. That's the part of the bandwagon that is on solid ground.

 

Bernard Hickey

 

Bernard Hickey is the managing editor of interest.co.nz

 

Pictured: Reserve Bank Governor Alan Bollard announcing last month's 50bp cut in the OCR. Photo/ Mark Mitchell