Banking’s big guns front commission’s probe hearing
The big guns of the banking industry attended the Commerce Commission’s competition conference in Auckland to be told again theirs was an industry lacking sustained competition, and characterised by high profits.
ANZ chief executive Antonia Watson, Bank of New Zealand chief executive Dan Huggins, Westpac chief executive Catherine McGrath, and ASB chief executive Vittoria Shortt all spoke in person at the conference.
A senior commission spokesman said that contrasted to the commission’s conference in 2022 when the chief executives of big building supplies companies sent subordinates to attend.
The conference is being held to hear views on the commission’s draft report on competition in the banking sector in March. That report said New Zealand’s big four banks were highly profitable and operated as a stable two-tier oligopoly without strong competition in the personal banking market leading to market shares remaining stable.
Commission chair Dr John Small said: “The profitability of the New Zealand banking sector, and major New Zealand banks, appears relatively high.” He said explanations provided by banks on their levels of profitability had not fully-explained what the commission had observed.
He said the commission could recommend changes to the way the banking industry worked to improve competition.
Though banking profits have become a big public issue as bank profits have remained elevated while households have experienced a cost of living and home loan repayment crisis, Small revealed the commission only got 30 submissions on its draft report. The big four bank executives sought to portray the retail banking market as highly competitive.
Huggins said every day BNZ bankers had to fight other banks to win and retain customers.
BNZ said Kiwibank provided significant “constraint” on big banks, as did local banks like TSB in Taranaki, and SBS in the South Island. It said evidence shows banks responded to each others’ pricing across their products, including home loans, and Kiwibank was winning a significant amount of new home loan business.
Kiwibank chief risk officer Mike Hendriksen disagreed.
“We are a quarter of the size of the smallest of the big four banks. We don’t see ourselves as a competitive restraint on the other four,” he said.
TSB chief executive Kerry Boielle said BNZ was overstating the competition smaller, regional banks could bring.
“I don’t think that adds up to sustained national competition,” she said.
Emma Ihaia from Link Economics, engaged by Kiwibank, gave the example of Kiwibank having dropped its variable rate mortgage rate for more than a year, but none of the big four banks had responded.
However, the big banks said the pricing of green loans for things like buying electric bikes and insulation was an example of sustained competition that had driven loan prices down to unsustainable levels for banks.
However, social investment expert Kent Duston from Habilis said the green loan fight was a text-book example of sporadic competition between the big banks, which later settled into a stable equilibrium dominated by the big four banks.
The commission remained concerned that banks use price-matching to stifle competition, and create customer inertia, where people rarely change banks.
Price-matching is the practice of banks offering to match rivals’ rates for individual customers to stop them moving to another bank, while not changing their advertised lending rates.
However, Watson said the industry was seeing 20% switching of existing home loans coming up for refixing each month.
“I think that’s pretty good evidence that switching behaviours are pretty strong,” she said.
Tex Edwards, founder of 2degrees, from Monopoly Watch said “switching in the clubhouse” was not competition. The country needed people to be switching to new banks with lower margins, he said.
When it came to profitability, smaller banks were less profitable, but Watson said the returns that were acceptable to small bank shareholders would not be acceptable to shareholders of larger banks.
She said ANZ was only making a return that was modestly above its cost of capital.
Watson said ANZ was the largest importer of foreign capital to New Zealand, and said: “Our shareholders wouldn’t do that if we showed returns like those of the smaller banks.”
Duston said the OECD’s latest study on New Zealand said that New Zealand's banks are twice as profitable as they really should be. In Europe, banks made about 7% return on capital, while in New Zealand, they were making 15% return on capital.
Watson said the OECD comparison was a bit blunt, and did not compare New Zealand banks with similarly-constituted banks overseas.
She said it also did not take into account the risks that were specific to New Zealand, being a small country reliant on commodity prices, several large trading partners, and at high risk of natural disasters.
The big four banks had attracted around $50 billion of investment to New Zealand. That was about half the value of the entire KiwiSaver balances of New Zealanders, she said.
Edwards said there was no evidence the benefits of scale were being passed through to consumers, and the commission needed to do work on the value to the big banks of the implied “too big to fail” guarantee from the New Zealand taxpayer.