KEY POINTS:
During 2007, the slowing housing market and credit crunch have marked the end of what has been a golden run for New Zealand's major banks.
Annual growth in net profit has slowed from the high teens to a little over 10 per cent at best.
That is, of course, still very healthy. However recent weeks have seen the big four Australian banks, which own about 90 per cent of New Zealand's banking industry, talking more and more about growth opportunities overseas, beyond the relatively small market here.
That talk has also sparked a renewed focus on Australia's Four Pillars policy, which disallows mergers and acquisitions between the major banks.
If the policy is reviewed, allowing the consolidation the banks say is necessary to achieve the scale required for them to foot it with emerging Asian rivals, that will inevitably have repercussions here.
The housing market slowdown, which has helped temper bank profits, reflects overseas trends, but in New Zealand it has in no small part been engineered by the Reserve Bank's four interest rate increases in the first half of the year.
As is the case in other countries, the credit cycle in New Zealand has clearly turned, and a sign of this is that during 2007 at least one or two of the major banks' results were hit by increased provisioning for bad and doubtful debts.
"It is by no means yet at a level which would give grounds for concern," said Massey University head of banking studies David Tripe. He said that, for some years, it had been at a very low level.
However, Tripe expected to see provisioning increasing over the coming year.
But the competitive environment in New Zealand means banks are unlikely to be too aggressive in driving per customer returns higher, unless they can do it without giving up customer satisfaction ratings.
"It takes a long time to get it back again when you wreck it," said Tripe.
"That is, in essence, the problem the ANZ had. They wrecked their customer satisfaction rating in the nineties and it's nearly 2008 and they're only just starting to recover."
Beyond the banks' control is something that will also affect customer satisfaction - rising interest rates.
Before it gained traction with last year's increases, the RBNZ's efforts to cool the market were somewhat frustrated by the fact that a big chunk of the commercial banks' home lending was on fixed rate loans, whose rates were driven to a large extent by those on international money markets where the banks' sourced much of their funds.
However that exposure to the international money market, which was a blessing for home buyers when rates there were low, is likely to be bad news over coming months thanks to the so called "credit crunch" generated by the US sub-prime debacle.
The major Australian banks maintain they have virtually no direct exposure to the sub-prime market, but they and their customers are exposed via the money markets.
"There's something of a climate of fear in financial markets," said Tripe.
"That means that you're wary about taking long term risks with exposures to other banks and if you want to raise money in the interbank market it's more difficult to do so."
Recently, John Stewart, chief executive of BNZ's owner National Australia Bank, told the Business Herald he believed the sub-prime situation "is nowhere near finished".
"It's very serious in the United States, it's almost as serious in Europe just now. The Australian banks are very liquid, very safe and have no problems raising funds, that includes us, but the price has gone up for everyone. Of course that additional cost will passed through to the customer."
By how much would depend on where credit markets eventually settle, and the type of product customers are buying, said Stewart, but as an indication he expected increases around 10 to 20 basis points.
Meanwhile an interesting facet of the sub-prime/credit crunch issue is that it may speed up what is looking like an inexorable shift in economic power from West to East.
Meanwhile, a standard line from economists is that should the sub-prime issue and the wider US housing market slump tip the US economy, still the world's largest, into recession, the rest of the world will largely be cushioned because China and India now have sufficient size and momentum of their own to offset it.
Closer to home, the Australian banks are clearly mindful of the increasing economic importance of the Asian economies.
The appointment of former head of HSBC Asia boss Mike Smith as ANZ chief executive last year signalled the bank's increasing emphasis on Asian expansion.
He has wasted no time talking up his ambitions to build a regional superbank, large enough to see off what he sees is an inevitable move by one of the Chinese banking giants on one of Australia's big four within a few years.
Westpac's David Morgan is less convinced, saying the numbers for a Chinese bid just don't stack up. NAB's Stewart sits somewhere between his two counterparts.
What all three have in common though, is a view that the Four Pillars should be reviewed, allowing them to merge or acquire one another as they see fit.
Why does this matter to New Zealand?
"The problem there is that the merged banks would have a huge market share in New Zealand," says Tripe.
"I don't see the competition authorities here or anyone else being particularly happy about that.
"So you think OK, let's sell one of these NZ businesses, but who on earth is going to buy it? If you were an international bank, why would you buy a bank in New Zealand if you didn't have one in Australia?"
That is perhaps something that Smith is mindful of.
Recently he raised the possibility of "floating off" some of ANZ's New Zealand operations.
"That would be good for New Zealand investors," says Tripe.
"But given the value of those banks it would take years for the New Zealand stock exchange to absorb it.
"If one of the big four wanted to quit their New Zealand business by about 2015 they'd probably have to start with a partial float by 2008."
ANZ spokeswoman Virginia Stracey-Clitherow told the Business Herald that when ANZ bought The National Bank four years ago, "it was observed that a partial share float of ANZ National was a possibility at some stage in the future. Mike Smith's comments this week reiterated that position.
"At this stage nothing has changed, there are certainly no imminent plans for a share float, nor is any part of the ANZ National business up for sale."
In any case, such a proposition faces diverse hurdles including the knotty issue of mutual recognition of imputation/franking credits.
Watch this space.
