Big banks generate big profits

As banks prepare to reveal latest results, Susan Edmunds asks: Are we being ripped off?

Today ANZ will reveal how much money it made from New Zealanders in the past year. Last year, it pulled in nearly $2 billion. Compare that with Vodafone, which made $21.3 million in the year to March, Spark which pulled in $409m, and Meridian Energy which made $339m.

While ANZ is the biggest of the banks, it is not the only one making large profits.

Westpac made $1b last year, ASB almost $1.2b, and BNZ $490m. Combined, the banking sector made $5.77b in 2018, a new record for the sector, according to KPMG, or $1202 per New Zealander.

Some commentators argue there is an element of unfairness about the big money being made.

Our big four banks are Australianowned, with largely international shareholders, so those billions of dollars being earnt by providing a service few of us could do without are being sent overseas.

That is exacerbated by the fact the New Zealand businesses are more profitable than their Australian counterparts.

KPMG data shows Australia’s banking sector made $29.5b over 2018 or $1199 per Australian. While as a group ANZ made A$6.4b, its Australian retail banking continuing operations made A$3.58b compared with $1.475b in New Zealand, despite having three times as much money in loans to Australian customers.

KPMG said the major Australian banks had a net interest margin of 200 basis points. That is the difference between what they charge for loans and what they make from money deposited.

In New Zealand, it was 212 basis points.

A memorandum for the Reserve Bank banking steering group from bank senior analyst Charles Lilly said New Zealand’s big bank revenues were close to other countries when measured against the size of their balance sheets but their expenses were lower. That meant the large banks had the second-to-highest profitability of the countries considered.

They were generating return on equity of 18.4 per cent, only behind Canada, which topped 20 per cent. As a comparison, Meridian returned 6.6 per cent, SkyCity 13.91 and Spark 27.75 per cent.

‘‘On one hand, it is possible the large New Zealand banks’ relatively high RoEs are an outcome of disproportionate risktaking (high leverage), that would not be possible without unpriced, implicit government support. A move to higher capital levels could be justified from a prudential perspective as a way to correct this unintended subsidy. Further work, beyond the scope of this paper, would be needed to substantiate this hypothesis,’’ Lilly said.

‘‘On the other hand, high RoEs compared with peer countries may be an outcome of the level of (or lack of) competition within the banking sector, and/or due to a risk premium associated with New Zealand equity investments in general. Regulatory capital settings are unlikely to be the right policy tool to address perceived issues with either of these. It is also worth noting that high firm profitability does not on its own indicate a lack of competition in a particular market.’’

Cameron Bagrie, former ANZ chief economist and now running Bagrie Economics, said the banking sector was ‘‘sensationally profitable’’.

‘‘There is nothing wrong with banks making a profit. You would want them to be a profitable, well-functioning sector but their after-tax return on equity of about 15 per cent suggests to me a lack of competitive pressure in the sector.’’

Paul Brownsey, chief investment officer at Pathfinder Asset Management, said the increased profitability in New Zealand compared with Australia was probably due to New Zealanders’ lack of options.

‘‘Australia does have other mortgage providers New Zealand doesn’t really have. ‘‘We have the banks and no-one else. ‘‘Kiwibank has struggled to make inroads.’’ Brownsey said there was less competition in a lot of industries in New Zealand compared with Australia.

‘‘We have two chains of supermarket while Australia has got a couple more and regional players as well.’’

If Reserve Bank proposals to require higher capital reserves are adopted, that would push the banks’ return on equity down to more like 11 per cent.

Sam Stubbs, founder of Simplicity, said that would still only bring returns in line with the banks’ Australian parent companies. He said Australian banks were making 20 per cent more from New Zealanders than from Australians, if you took bank profits and divided it by GDP per person.

‘‘Bottom line? For the big four Aussie banks, New Zealand is a cash cow.’’

New Zealand Bankers’ Association chief executive Roger Beaumont said banks were invested heavily in New Zealand and shareholder returns were crucial to maintain that. ‘‘Shareholder returns are in the middle of the pack compared with other major New Zealand companies.’’