Why don’t we support Kiwi banks?

Daniel Dunkley looks at the state of New Zealand’s banking sector and whether those big profits are fair.

Whether you have a huge home loan for a dream property or a term deposit for a rainy day, the chances are you use an Australian bank.

According to the Reserve Bank, Australian-owned ANZ, BNZ, Westpac, and ASB control 86 per cent of the nation’s lending market.

The ‘‘big four’’ also have the lion’s share of deposits, KiwiSaver funds, and credit cards.

In contrast, New Zealand’s five largest domestic banks – government-owned Kiwibank, TSB, SBS, Heartland Bank, and The CoOperative Bank – make up a small fraction of the market.

New Zealand lenders make up 8 per cent of total non-financial private sector borrowing, according to the Reserve Bank.

For years, New Zealand’s Davids have tried to take on Australia’s Goliaths but have struggled to win business off their better-funded, better-resourced rivals.

With large platforms across the Tasman, the Aussie groups have the size and scale to raise more capital, write more loans, and make bigger profits. Like their Australian counterparts, New Zealand’s domestic banks have turned in decent profits in recent years.

Kiwibank made $108 million after tax in the year to June; TSB made a net profit of $45m; while SBS reported an operating surplus of $40.8m during the last financial year.

Heartland Group recorded a posttax profit of $73.6m, while The CoOperative Bank made $9.5m.

But the domestic banks have struggled to break the stranglehold of the big four.

So what are the main barriers for small banks?

What are they doing to narrow the gap?

And do Kiwis care where their bank is based?

Shaun Drylie, chief executive of Southland-based SBS Bank, a mutual lender, believes more customers will switch to domestic banks as they become ‘‘jaded’’ with ‘‘large banks who are there primarily to make money for their shareholders’’. ‘‘Mutuality isn’t that well understood,’’ Drylie said, describing the SBS model. ‘‘But the value you create is passed back to customers, not to shareholders.’’

SBS recently slashed its two-year mortgage rate in an effort to take on the big banks.

Yet Drylie admits there is an ‘‘inertia’’ among customers, who are often reluctant to switch current accounts and savings products to a new bank.

‘‘It is a challenge because people think it is harder than it is to change banks,’’ Drylie said. ‘‘You can set up an account with us in 30 minutes but people have a preconception that it is hard.’’

Drylie said it was tough for smaller banks to grow market share in a low interest rate environment, where it was harder to profit from traditional lending products.

‘‘The big four have scale, and scale does matter. It is difficult for the smaller banks to go head-tohead.’’

Funding and capital constraints are a big issue for small banks, particularly those like SBS, which are unable to raise cash from external shareholders.

To address the problem, domestic banks have asked the Reserve Bank for permission to raise capital ‘‘instruments’’ from financial markets, to help them expand.

Discussions with regulators are ongoing. New capital proposals from the Reserve Bank could benefit smaller banks.

Domestic banks currently hold a bigger percentage of capital aside than the big four. New rules under consultation would narrow the gap.

The proposals have received a cautious welcome from the domestic banks.

Small banks believe changing consumer trends could play into their hands.

Donna Cooper, chief executive of TSB Bank, believes more people will take social impact into account as they ponder their choice of lender.

TSB is owned by the TSB Community Trust and allocates roughly

20 per cent of profits to the trust’s charitable causes.

‘‘People are stopping to think about the type of organisations they support and are thinking about the broader footprint, their value to the community, and the way they behave.’’

She believes the Australian royal commission, which found systemic misconduct across the major banking groups, will make customers think twice about their choices.

‘‘I would love for New Zealanders to step back and think about the organisations they choose to bank with. The royal commission brought into focus behaviours where the customer wasn’t being put first. People want a bank that does right by people.’’

Domestic banks have adopted an aggressive stance towards their Australian rivals since the royal commission, taking aim with special offers and advertising campaigns.

Kiwibank’s TV ads during the Rugby World Cup warned customers against backing Australia, while TSB challenged the big four with a price match offer on home loans.

But banking experts say most customers are happy with the status quo. According to Consumer NZ’s

2019 survey, 6 per cent of consumers switched banks over the past year, with 7 per cent ‘‘likely’’ to change over the coming year.

It is easier than ever to change but customers are reluctant to do so.

Major banks agreed a switching accord in June, pledging to make switches happen within five days.

Yet according to Consumer NZ’s survey, 29 per cent of Kiwis still believe it is ‘‘too difficult’’ to move.

Massey University’s Claire Matthews said the reluctance to switch was one of the biggest challenges facing small lenders.

Efforts to win over customers with patriotism would ‘‘appeal to a percentage of the population’’ but most people wanted to avoid the perceived ‘‘hassle’’ of switching banks.

Matthews said open banking, the move to greater openness in payments and financial services, could benefit smaller lenders in the years to come.

But for now, she said most customers were unlikely to break existing habits.

‘‘Customers have chosen, and are happy with their banks.

‘‘They’re getting a product they are happy with, at a rate they are happy with,’’ she said.

‘‘One of the key drivers of people moving is when they get upset with their bank, or if there is a home loan offer.

‘‘But beyond that, people just don’t change, and there has to be something to push them.’’

‘‘I would love for New Zealanders to step back and think about the organisations they choose to bank with.’’ Donna Cooper chief executive of TSB Bank