The curious case of National’s bank-bashing

Saturday, 24 August 2024

OPINION: Just what is this Government up to?

One minute Prime Minister Christopher Luxon and Finance Minister Nicola Willis are lecturing the country on fiscal prudence and getting the place growing and the next minute they’re bashing the banks for making profits that are too big.

When Willis stood up and castigated the banks (which, don’t you know, are Australian-owned) on Tuesday, she sounded much more like a Labour minister than a National Party one. Jacinda Ardern made similar noises in late 2022 when sharing her view that the banks (which, don’t you know, are Australian-owned) made too much money.

Ardern’s comments were made when inflation was at its height, Willis’ are made in an environment where those high prices have now been baked in.

Senior members of the Government are very exercised about what they consider the profiteering in the banking sector. In response to the Commerce Commission’s market study into banking competition released on Tuesday, Willis leapt in full populist, saying competition in the sector resembled a “cosy pillow fight”.

Other members of the Government have also been irked by bank chief executive public comments since the release of the report.

So on the one hand the National Party views itself as the grown-up economic manager and on the other it’s a Government with views about how much money the banks make.

The latest market study is a mixture of good prescriptive work, analysis and a mixed bag of recommendations. It claims there isn’t aggressive enough competition - price matching being largely the extent of it, and underinvestment in tech by the big banks. It also has a range of regulatory proposals, a number of which are directed at the Reserve Bank.

The politics of this are interesting. Luxon wouldn’t have taken too kindly to being upbraided about a lack of competition and high domestic customer prices when he was Air New Zealand CEO. But he and his Government are now happy to dish out their profit reckons.

It was also notable that despite the tone taken by Willis and Andrew Bayly, most of the recommendations from the Commerce Commission involved regulatory settings, not the conduct of the banks.

In particular it took aim at the Reserve Bank and its emphasis on capital requirements coming at the expense of competition. That is part of a legitimate tension between regulated bank strength and strong balance sheets and any effects that might have on competition.

The language was calibrated to make the Government look tough.

None of this is to say that more competition wouldn’t be a good thing, and the bank tech available to New Zealanders (which is mostly accessed via mobile phones) is of an inferior quality to that being enjoyed by consumers in Australia; but despite Willis’ tough talk, outside of the regulatory area there is little the Government has proposed to improve it.

Instead, the Commerce Commission - and now the Government - wants to position the poorly capitalised Kiwibank as a disruptor in the sector.

Unlike the press releases accompanying it, the report itself was upfront about the limitations of any actions taken to try to boost competition. Its support of a newly capitalised Kiwibank, for instance, acknowledges that just having another bank wouldn’t necessarily increase competition, but that it seems the best short-medium-term option anyway.

It also included this sage observation:

“Observing that profitability across a market is consistently high does not mean that the market could be more competitive. It may be that there is no way to force stronger competition.”

The Government-owned bank becoming disruptor in the banking sector? What could possibly go wrong?

The Steve Jurkovich-run bank delivered the bank’s best ever profit result - a $202 million net profit. But in the end it is still a fully Government-owned bank and without decent capitalisation and disciplines created by listing publicly, it is unlikely to ever be a “maverick”.

And if it were to be so, the best thing the Government could do would be to tip a bunch of capital in and then float it (otherwise known as privatisation) which it is unlikely to do. It is casting around to see what structure might get government and private KiwiSaver funds interested in it.

The politics of bank-bashing seems obvious, but it rarely has a lasting impact. Taking on the banks is more complicated than it might seem. Yes, on the one hand, the public resents how much money the banks make, and banks in general.

But, in particular, people usually actually like and are loyal to their own banks. And more than 85% of us bank with one of the big four banks. Changing banks is easy, yet people rarely do it. As with other utilities, with the exception of assiduous bargain hunters, most people stick with what they have.

And while the bank margins in New Zealand, expressed as a return on equity, are certainly at the larger end of things, most jurisdictions around the world have 3-5 banks servicing most of the population, with some competitive pressure at the margins.

In Australia, the Commonwealth Bank of Australia, parent company of ASB, has the highest share price of any bank in the world, 25% home loan market-share and just paid out a whopping $A2.50 (NZ$2.73) dividend for a total of $A4.65 per share for the year. It was a government bank privatised in 1991-1996.

ANZ is the smallest bank of the big four in Australia and the largest in New Zealand, with a market share of 28% in home loans and 30% in deposits.

The other thing to remember is that the politics of the Big Four banks in Australia is pretty similar to that of New Zealand, except on this side of the Tasman, the word “Aussie” is put at the front of the banks. The so-called “four pillars” policy means that the big four cannot take each other over - but they can and do gobble up smaller banks from time to time. ANZ Australia recently purchased Suncorp, which made it past the competition regulator.

In Australia, there has recently been considerable competition over the share of the nation’s mortgage book.

The other area identified by the Commerce Commission and picked up by the Government has been “open banking”, which has long been a siren song for banking competition enthusiasts.

But an Accenture report, commissioned by the Australian Banking Association, found open banking services have had a pitiful uptake and that low uptake has actually increased costs for mid-tier banks that need to spend a higher proportion to comply with the rules.

As in New Zealand, there is a heated debate between the big banks and the Fin Techs over whose fault this is. It echoes the situation here very closely.

Open banking is a good thing and the right regulatory settings and “data right“ laws will likely see it grow, but if the Australian experience is anything to go by, it isn’t going to be a big game-changer, at least in the near term.

And while banks have been accused of dragging their heels on these matters, it should be seen in a similar context to Labour’s now-reversed Credit Contracts and Consumer Finance Act changes. Banks are rightly extremely risk-averse about anything that might compromise their tech platforms. Just as banks conservatively applied CCCFA rules because falling foul of the law is a bad thing, changes to tech stacks and anything around consumer privacy are also carefully considered.

So where does all this leave New Zealanders? Well, in much the same position than prior to the Commerce Commission report. More competition would be good, but there isn’t a simple fix.

The politics of it are far more curious. Consider another big sector that the Government is looking at - the gas and electricity markets. National is looking at ways to increase supply of gas for both industrial use and electricity generation. It looks likely decisions will be made on that early next week, including confirmation of a big LNG importing terminal and possibly some new peaking power capacity.

On this issue National is doing the regulatory stuff and trying to sort the immediate problem while NZ First - Shane Jones in particular - has been making the populist running on the sector more generally being stuffed and allowing gentailers to overcharge people.

Yet National has not left NZ First to make the populist running on the banks. It may be that the Government is simply trying to jawbone the banks a bit and informally put them on notice.

Across the Tasman, when there was significant pressure on the Turnbull government over bank profits, then-Treasurer Scott Morrison announced in the 2017 Budget a “major bank levy” that was whacked on the Big Four banks plus Macquarie Bank.

A few months later a Banking Royal Commission was announced that ran through to early 2019 and drew a picture of a most well-performing bank system that had pockets of egregious behaviour in most of the major institutions. Recommendations were made, changes were enacted and Australia made peace with its banks - for a period at least.

This cash-strapped Government could be tilling the ground for something similar in the future.

More competition is always good. But in the absence of any more significant moves, the enthusiasm of the bank-bashing, while predictable politics, seems off-brand for National and performative at best.