Does the defence of bank profits stack up?

These are the numbers that show how profitable our banks are compared to their counterparts overseas. Rob Stock reports.

As banks collapse and are bailed out in the United States, New Zealand can be pleased that its banks remain strong, says John Kensington, head of banking and finance at KPMG.

Kensington has mounted a defence of New Zealand’s under-fire banks, which are accused of making excessive profits.

Kensington set out to show that bank’s combined $7.18 billion-a-year after-tax profits last year were reasonable when compared to other large New Zealand companies when looked at in the light of a return on equity (RoE) for shareholders.

Shareholders invest money in companies in order to earn a profit, and RoE is a measure that expresses a company’s profit after tax as a percentage of average equity during a period of time, usually a company’s financial year.

Kensington said the New Zealand banking sector had a RoE of 13.4% in 2022, compared to 15% on the companies in the NZX50 Index of leading companies listed on New Zealand’s exchange. Shareholders could theoretically sell their shares in banks, and reinvest the money in other companies providing higher returns.

Kensington’s comparison was a re-run of a defence of bank profits made in 2012 by the New Zealand Banking Association Te Rangapu¯ Pe¯ ke, when average bank returns on equity from 2008 to 2012 ranged from 7.5% to 16.3%.

In 2022, RoE for Westpac was 12.66%, for ANZ it was 14.79%, and for ASB it was 15.16%. Those three banks saw their RoEs rise during the year. Two of the big banks had their RoEs fall: BNZ with an RoE of 13.5% and Kiwibank with 6.67%.

But the comparison with non-banks a reasonable one? Bank critic Sam Stubbs says no.

He says the comparison is spurious because none of those other New Zealand companies are backed by a massive, implicit government guarantee. Banks get protected by governments during periods of crisis, he says. What they should be compared to is the RoE on overseas banks, he says.

KPMG in Australia publishes a similar banking report to Kensington’s. ANZ’s RoE in Australia was 10.4% compared to 14.79% in New Zealand. Westpac’s RoE in Australia was 7.5% compared to 12.66% in New Zealand. BNZ’s Australian owner NAB’s RoE was 11.7% compared to BNZ’s 13.5%. ASB’s Australian owner CBA’s RoE was 12.7% compared to ASB’s 15.16%.

The big four Australian banks managed to squeeze up their margins, and increased their RoEs by an average of 66 basis points to 10.6% in 2022. NZ banks increased their average RoE by 91 basis points to 13.4%.