Are profits too high? Why it’s not that simple
There’s no arguing that two billion isn’t a big number. And the timing of ANZ’s $1.98 billion record result and BNZ’s $1b profit last week isn’t great given the Review of Bank Conduct and Culture is due today — the local version of Australia’s banking inquiry.
But it’s easy to beat up on the banks for making money. What’s often overlooked in criticism of their large profits is just how big these organisations actually are in terms of overall equity value. In other words they are made of money. When market conditions are good it’s hard not to make more of it.
When you rank New Zealand’s listed companies based on the return they make on equity, bank profits look more reasonable.
ANZ, for example, makes a 14.5 per cent return on equity (according to the Reserve Bank).
The other banks have ROEs that range from 13 per cent to 16 per cent — so not far off the top performing KiwiSaver growth funds.
Industry lobby group NZ Bankers Association did a comparison in 2015 which showed the big banks were squarely in the middle of the pack compared with other listed companies.
Many of New Zealand’s NZX50 companies have much stronger returns. At that time, numerous listed retailers and Telecom/Spark were all averaging returns on equity of between 20 and 30 per cent. Reward is all about risk, of course, and higher risks for investors usually mean higher returns.
That raises questions about the nature of banking and its place in our social system. Should banks be measured on the same basis as other listed companies? Should they be taking less risk and making less money?
There is probably a deeper debate to be had on that matter. And will no doubt be part of the discussion in today’s review.
It’s true that most of the New Zealand bank profits head offshore and from a nationalistic point of view that’s not great news. But New Zealand is a small nation and, for better or worse, we made the decision to outsource our banking risk when we sold out in the 1980s and 90s.
In what now looks like a particularly unsettled economic era for the country, we lost our nerve and sold-off the sector. The collapse of the BNZ, followed by a bail-out and selloff in 1990, was a symbolic waving of the white flag on local banking. By then we’d sold the Post Office Savings Bank to ANZ and most of the ASB to the Commonwealth Bank of Australia. The 1990s would see the TrustBank network sold off to Westpac.
Perhaps we should have backed ourselves and tried to fund our own way to prosperity. We might now be a lot richer. But given the dire state of the economy at the time those decisions were made, we might just as well have gone broke.
Should we regulate and monitor the banks closely to ensure they are playing fair and we’re not being ripped off? Absolutely.
Hopefully, today’s review will address any deficiencies in the way the banks are operating. It seems unlikely it will find the kind endemic problems we’ve seen in Australia.
The reality is we need healthy banks to fund the debt-laden way we live in this country. Strong profits are at least an indication of a strong local economy. If the banks were losing billions we’d be in very big trouble.