Former big bank chief economist says banking probe is missing the real problem

Thursday, 22 June 2023

Economist Cameron Bagrie says the Government’s banking competition probe is focused on personal banking. ‘It’s not where the inquiry should be’.

The Government is looking in the wrong place in its competition probe into banks, says former big bank economist Cameron Bagrie, and he says bankers will be celebrating.

“Personal banking is where we have got the least problems,” says Bagrie, owner and director of Bagrie Economics, and Chaperon, a company which helps businesses find credit.

“Business banking is where we have got the most problems, and where we have the biggest opportunity to fix things,” says Bagrie, who was chief economist at ANZ for more than a decade.

“If we really want to shake the tree on banking, you wouldn’t leave business banking out of it. In fact business banking would be the first place you would look.”

But the Government’s notice to the Commerce Commission directing it to inquire into competition in the banking sector limits it to only looking at retail banking.

The announcement of the market study, which will be completed by the end of August next year, follows mounting anger over massive bank profits as households struggle with a cost of living crisis.

Commerce Commission probe into retail banking competition

But Bagrie says it’s not hard to see where the real anger lies.

The net promoter scores (NPS) for retail customers at the big banks are all positive, according to the banks’ own data.

An NPS measures the net likelihood of customers recommending an organisation to other people, and is calculated by subtracting the proportion of customers who are “detractors” who score it 0-6 on a scale of 0-10, from the proportion of customers who are “promoters” and score it 9 to 10.

Big bank net promoter scores for retail customers.

A positive score indicates happy customers outnumber unhappy ones.

The net promoter scores for big banks’ business customers are all negative.

Big bank net promoter scores for business customers.

There are several reasons for this, Bagrie says.

“Banks have been cutting the guts out of their frontline business operations in regards to staffing,” Bagrie says.

“You don’t have those business banking people like we used to, who were solution providers, with credit skills,” he says.

“Banks run really low cost-to-income ratios, which is one of the reasons they are so profitable. But what I think has gone on is they have cut so much cost now they have gone from cutting out fat. They are now into muscle,” he says.

But banks had also been tilting their lending away from business lending, and towards ever-more mortgage lending, incentivised to do so by regulatory capital rules that make them hold more capital to back business lending.

ANZ’s Business Outlook survey asked businesses about ease of access to credit, calculating an index score that was negative when more businesses were finding it hard to access credit than were finding it easy.

“That question on access to credit has been negative for about five years,” Bagrie says.

Difficulty accessing credit, and negative NPS scores were a permanent feature of the business banking market now, Bagrie said.

“The banks have just decided to sink a lot more into the housing market.”

Credit is essential for economic development and growth, he says.

“We are not going to get a result here by selling more expensive houses to each other,” he says.

“The banks through their business lending practices are actually holding New Zealand back.

“There’s a huge gap in the market for one of the big players to say ‘we’ve got the back of your business’, but what that means is playing the long game, not the short game,” he said.

“What we know about banks is they like to chase short-term profits.”

There is pricing transparency in the retail banking market, Bagrie says.

Big banks are largely asset lenders. They secure as much of their lending as they can against residential property.

Banks are fighting furiously for home loan market share. Mortgage brokers pitch home loan businesses to multiple banks. Opening personal bank accounts at a new bank is easy.

“The situation is fundamentally different in the business sector. We don’t have the transparency,” Bagrie says.

Bagrie is not talking about really large businesses.

“The bigger end of town knows where the pricing should be. There’s a lot more competitive tension,” Bagrie says.

A further issue business owners face is being charged risk-rated interest on loans, while the banks protect their loans by taking security over their homes.

“They securitise everybody up to their eyeballs. They price for risk, but they don’t actually take a lot of risk,” Bagrie says.

‘Banks are among our biggest businesses, so their profits look big. They also contribute their fair share to New Zealand,’ says New Zealand Banking Association chief executive Roger Beaumont.

Pricing for risk, while not actually taking much, helped explain their unbroken run of profitability.

“Banks have seen some years when profits have dropped, but they’ve never made an annual loss going back 30 years. Tell me another sector in New Zealand that has had 100% profitability year after year, and never makes a loss,” Bagrie says.

“If I was at the Banking Association last night it would have been a ‘crack open the champagne, we are celebrating’ night.”

The New Zealand Banking Association Te Rangapū Pēke has welcomed the Commerce Commission market study.

“We believe the inquiry will ease any concerns in the community about competition and innovation in the banking industry,” said chief executive Roger Beaumont.

“We have a competitive banking sector, with 16 retail banks operating in New Zealand and easy bank switching. We are open to the opportunity to discuss the contribution banks make to support the New Zealand economy, households, and businesses.

“Our banks are highly regulated, well capitalised, and profitable. That helps makes them resilient, and with recent overseas bank failures we’ve seen why that’s important.”