Bank profits: 'Comparing the banking industry to building companies is ridiculous'

Thursday, 16 March 2023

New Zealand banks are more profitable than banks overseas.

ANALYSIS: As banks collapse and are bailed out in the United States, and wobble in Switzerland, 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, and look increasingly likely to face the scrutiny of a Commerce Commission “market study”.

“Although the banking sector provides a range of essential services, and is fundamental to our economy, some will still say that the profits are still not justifiable,” Kensington says.

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.

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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.

John Kensington, head of banking and finance at KPMG, says, ‘Many people who claim lower profits ‘would be better’ perhaps haven’t fully thought through the consequences of what they are wishing for.’

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 Rangapū Pēke, when average bank returns on equity from 2008 to 2012 ranged from 7.5% to 16.3%.

The association’s chief executive at the time was Kirk Hope, now chief executive of Business NZ, who said banks fell in the middle of the range of profits compared to NZX-listed businesses.

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?

Outspoken bank critic Sam Stubbs, founder of the Simplicity KiwiSaver scheme, 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 like the global financial crisis and the Covid pandemic response economic disruption, he says.

“Comparing the banking industry to building companies is ridiculous,” he says.

“Banks are inherently much less risky because the losses are socialised, and the gains privatised. They have an implicit government underwrite.”

What they should be compared to is the RoE on overseas banks, he says.

Kensington concedes that is also a fair comparison to make in trying to get a perspective on bank profits.

KPMG in Australia publishes a similar banking report to Kensington’s in New Zealand.

ANZ’s overall 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%.

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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, KPMG reported.

By contrast, New Zealand banks increased their average RoE by 91 basis points to 13.4%.

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Global consultancy McKinsey & Company’s Global Banking Review for 2022 said: “Bank profitability reached a 14-year high in 2022, with expected return on equity of between 11.5% and 12.5%.”

Kensington warned that reduced profits for New Zealand banks would lead to a follow-on impact of decreased credit ratings and increased costs.

“We currently have a strong banking sector which is pivotal to our country, the economy, and an essential to the everyday lives of New Zealanders,” Kensington says.

“Banks are large organisations with equally large profits, but the numbers show they are no more profitable than many other major companies operating in New Zealand.

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“Many people who claim lower profits ‘would be better’ perhaps haven’t fully thought through the consequences of what they are wishing for.”

Those consequences could include banks having less ability for doing social good through things like zero-interest loans to flood and cyclone victims, or by supporting social good services like Westpac’s support for Auckland’s rescue helicopter, ASB’s support of ambulance charity St John, or BNZ’s funding no-interest social lenders.

Anti-monopolist Tex Edwards has called for a market study into competition in the banking sector. In February, he published a draft terms of reference for one providing something for people unhappy with bank profits to rally around.

He wants to see competition injected into the banking sector in an orderly manner to let the forces of supply and demand do their job.

Edwards, founder of 2degrees which broke Spark and Vodafone’s duopoly over the mobile market, wants to see bank account number portability mandated just as phone number portability was in the telecommunications industry in 2010, more than a decade behind other developed countries.

He also wants to see the Government get on with forcing open banking on the banking sector.

Open banking is a concept that is based on laws requiring banks to share customer information with other companies, if customers request it.

This enables technology companies to build services allowing people to pick and choose products from different banks, driving competition.

But progress on banking has been woefully slow, and Edwards points to a “smoking gun” letter in 2019 from Kris Faafoi, then Minister of Commerce and Consumer Affairs, who was defending his decision to let the banking and payments industry take the lead instead of passing open banking laws.

Last year, former Minister of Commerce and Consumer Affairs David Clark finally lost patience and announced the Government would pass laws and implement open banking, saying in November: “It's anticipated that work to implement open banking will take up to two years.”

Open banking was already a requirement on the Australian-owned banks’ parent companies across the ditch, he said, and was a fixture of the banking system in the UK.

“It’s a commonplace tool used overseas to increase competition and make it easier for customers to get better deals,” he said.