Super profits: Are banks making too much money?

Banks have come under fire from the Prime Minister for making super profits while New Zealanders face a cost-of-living squeeze but experts say it is a lack of competition which has allowed that to happen and the Government has been slow to act on bringing in open banking and account number portability which would open the market up.

Jacinda Ardern yesterday called on banks making record profits in the billions of dollars to assess their “social licence to operate”. Her stance came after ANZ New Zealand announced a record profit of $2.3 billion which was up 20 per cent on the prior financial year and Westpac New Zealand on Monday revealed a 12 per cent boost to its net profit which hit $1.047b.

ANZ CEO Antonia Watson defended the bank’s record profit by saying that while it was a large number the bank was a very big company and it was better to look at its profitability level which was around 13 per cent.

“That’s about the middle of the road for the top NZX companies. It has actually decreased over the last couple of years because of the additional capital we have had to put in for the RBNZ.”

Reserve Bank figures for the June quarter show the ANZ had a return on equity of 14.1 per cent, the same as the ASB, while the BNZ was 14.2 per cent and Westpac was 12.1 per cent. Meanwhile, Kiwibank was just 5.9 per cent.

Heartland, which does higher-risk mortgage lending in the form of reverse mortgages, had the highest ROE of 17.3 per cent. According to Bloomberg the NZX50 Index had an average return on equity of 12.14 per cent.

Claire Matthews, a banking expert at Massey University.

Claire Matthews, a banking expert at Massey University, said she didn’t believe banks were making too much money.

“If you look at their return on capital it’s about 14 per cent and if you look at other businesses that’s not an excessive return on capital. It’s actually quite modest.”

She said higher profits this year partly reflected the winding back of some of the provisions they made in 2020 and 2021 when there was an expectation of a downturn.

“They haven’t had the losses so they have been able to wind some of that back so that has contributed. And because the economy is doing really well banks do tend to do quite well when the economy does well.”

But William Curtayne, a portfolio manager at Milford Asset Management, said the New Zealand arms of the Australian banks had always been more profitable than the Australian arms.

“The simple reason is it is just less competitive in New Zealand. You look at the New Zealand industry we have got the big four then Kiwibank and Heartland - there is not a big industry of second-tier banks or non-bank lenders.”

That compared to Australia there were the big four banks but also a strong second tier in Suncorp, Bank of Queensland, Bendigo Bank and Macquarie Bank and then there was another big industry of non-bank lenders which could provide mortgages.

“You go to get a mortgage in Australia, you get a mortgage broker and there might be 16 or 18 different options.”

That competition in Australia meant the bigger banks had to bring down mortgage rates to be comparable to smaller players. “And it’s chipped away at the profitability of banks in Australia for the last decade. New Zealand hasn’t had that level of competition.”

He said that was not isolated to banking. “We suffer with it from a number of industries. We are not a big enough country to attract a lot of international competition or a big enough economy to have a dozen players.”

Curtayne said banks had made good profits in the last year but for the past few years they had done it tougher with interest rates falling to zero and bad debt provisions which were put aside due to Covid.

“In the last year they have unwound a lot of that. Interest rates have gone up so they are back to producing good returns again. It is really clawing back a lot of the poor returns that were achieved in the last few years.”

He said as a rule of thumb when interest rates fell it was bad for the profitability of banks but when they rose it was good for profit margins.

“So they are in a little bit of a purple patch.” But he said as interest rates stabilised and the increases flattened off and competition heated up the profits would go sideways again.

Simplicity co-founder and bank critic Sam Stubbs.

Sam Stubbs, chief executive of KiwiSaver provider Simplicity and a long-time critic of the banks, said the banks were making too much money but if the Government was concerned they should be taking action to stop it.

“The PM talks about the social license to operate. There seems to be quite a bit of hui but not much doey from the Government on bank reform.”

Stubbs said they could have bought in open banking and account number portability years ago.

“Why aren’t they doing what everybody else has already done? They talk about open banking - they could have bought it in three or four years ago. We are still waiting for that. They could bring in number portability - we know what that has done for phones - they haven’t done that.”

And he said the Government could recapitalise Kiwibank to get a proper local competitor.

“Now the Government owns it yes it can recapitalise it. It would be profitable and the Government would still make money and you would get a serious competitor.”

Stubbs said it would be interesting to see if the Government actually did anything.

“These are nice sound bites but so far what the Government has done is slap the banking industry with a wet bus ticket all through the pre-Covid profit period when it was huge, all through the Australian banking inquiry. They then provided them with a massive amount of free money during Covid.”

One of the first things the Government did was shore up the banking industry during Covid, he said.

“They have received a tremendous amount of tax-payer-funded support. How do they reward us? By making record profits when everyone else is doing it hard.”

He said banks could choose how much margin they made.

“The ANZ chose to make more money per dollar lent this year than it did last year. It made a conscious choice to do that. That’s fine, you are allowed to make those choices. But if the Government is really upset about that they have several options available to them.”

Open banking had come in around the world but here the banks had delayed that, Stubbs said.

“Policy-makers and politicians have just been asleep at the wheel on that. It just hasn’t happened.”

Stubbs rubbished calls for a banking inquiry.

“The Government could direct the Commerce Commission to undertake a market inquiry. I think the Government now is scrambling because it is embarrassing that the banks are making that amount of money. But the Government have absolutely facilitated that. They provided them with oodles of free money during Covid and they haven’t done anything to rein in their profit instincts.”

Matthews said beating up on the banks was a political vote-winner.

“I think it is electioneering. I think she [the PM] had just come out of a Labour party conference over the weekend where they were starting to gear up for next year’s election - so that’s part of it.”

“People like to hate the banks so it’s quite an easy win for the Government.”

She said if they thought it was a big issue they would come out with action not just talk about it.

The four big Australian-owned banks operating in NZ. Photo / NZME

The Green Party has called for a windfall tax.

But Matthews questioned what would happen if the banks had a bad year and then asked the Government to give them back the money.

“I kind of see the value in it but there is a risk associated with doing it, it is never as straightforward as it sounds.”

She said it could be better to get the Commerce Commission to undertake a market study like what it had done with the supermarkets and the building sector.

“The biggest issue we have got is we don’t really have the detail as to where they are making their money. There is a lot of focus on are they ripping off individuals but in fact maybe it’s not from the home loans and the depositors they are making money, maybe it’s from the businesses and international trading? In which case do we care so much?

She said it could answer some of the questions. “I’m not convinced it will show anything but potentially there is value in having that done.”

As to whether the Government should have a say on bank profits, Curtayne questioned whether New Zealanders wanted to live in a free market economy or a controlled economy.

“If you want more competition the way to go about it isn’t to threaten interference by the Government to remove profitability.”

He said he could see the Government’s frustration that the banks had higher profitability here.

“The question is what is the right way to go about bringing that profitability down? There are no easy answers. Every interference can have unintended side effects.”