Lack of love as banks don’t share households’ financial pain

Sunday, 12 May 2024

ANZ, Westpac and BNZ announced their half-year profits in the days before the Commerce Commission opened its conference to hear evidence on the state of retail banking competition.

ANALYSIS: Households are doing it hard; big banks, not so much.

Half-year reporting season revealed after-tax profitability dipped modestly at Westpac and Bank of New Zealand, while ANZ saw a small profit rise.

Banks are not immune from inflation. Their operating costs have climbed, and they have been shamed into beefing up their defences against scams and fraud by scathing media reporting.

But their half-year results show that the margins banks have been making remain elevated compared to the last decade, Reserve Bank Te Pūtea Matua data shows.

At the same time, all three have reported sharp rises in the number of households no longer able to manage their home loan repayments.

Sam Stubbs, chief executive of the Simplicity KiwiSaver scheme, says the big banks aren’t letting a little thing like a mortgage repayment and cost of living crisis get in the way of maintaining their margins.

Simplicity KiwiSaver chief executive Sam Stubbs says the only hope for more competition is open banking, but banks have successfully slowed down its implementation.

“All of them have made more money out of New Zealand than Australia again,” he says.

Westpac, ANZ and BNZ have all once more reported higher margins in New Zealand than their Australian parent banks, he says.

“Despite what the Commerce Commission says, and despite what the politicians say, the banks just don’t care. They carry on making as much money as they possibly can,” he says.

“In none of the New Zealand bank press releases do you see how the New Zealand bank margins compare to the margins of the Australian banks.

“In any other industry margins decline over time.”

Reserve Bank data does show that bank margins are lower than they were 20 years ago, a period in which their loan books expanded as people borrowed money from banks to bid up the value of homes.

But for Stubbs, the banks’ ability to repair their margins following a dip during the collapse of mortgage rates during the Covid pandemic indicates a lack of competition, and bank success in holding back the tide of digital disruption.

Open banking is the term for the tech-driven revolution in financial services overseas involving non-bank tech companies building money management and payment app services for consumers.

In the UK, for example, it’s allowed the launch of what are often referred to as digital neo-banks to challenge the brick and mortar banks.

The example of markets where open banking is well-advanced would suggest margins here would fall around 20%, if New Zealand caught up, Stubbs says.

That would equate to around $2 billion back in households’ pockets each year, he says.

Stubbs is not the only person to hold out hopes for open banking to bring down the household cost of banking.

In its Financial Stability Report earlier this month, the Reserve Bank said: “In our view, the best way to promote competition is to accelerate progress on open banking.”

And Commerce and Consumer Affairs Minister Andrew Bayly, speaking on Wednesday at the Retirement Commission Te Ara Ahunga Ora’s national strategy conference in Auckland, touted it as a way of bringing more competition to banking.

The chief executives of ANZ, Westpac and BNZ all work from carefully-prepared scripts on results day, tailoring their messages to the concerns of the day.

This year’s talking points all centred around the care they were showing for households experiencing tough times, especially those struggling to pay their mortgages, on which rates have risen sharply as a result of the Reserve Bank’s fight against inflation.

Dan Huggins, chief executive of BNZ, says ‘economic conditions are likely to remain challenging until there is a material reduction in interest rates.’

High profits were cast as being good for borrowers, because banks could support them.

BNZ chief executive Dan Huggins described his bank’s half-year result as a “resilient result in a subdued economic environment”, which meant it was in a “strong position to continue supporting its customers”.

ANZ’s result was “solid”, said chief executive Antonia Watson. “ANZ is a strong, safe and well capitalised business, positioned to support our customers through any tough times ahead,” she said.

She also said return on equity for bank shareholders was down as a result of banks having to put in more capital as the Reserve Bank sought to strengthen the banking sector.

“We will see that squeeze in profitability for the next five years as we continue to put in more capital each year,” she said.

Stubbs has little sympathy. Banks have an implicit government guarantee. They should pay for that with lower returns to shareholders, he says.

All three banks are expecting to see more people with home loans fall behind on their mortgages, which accords with the Reserve Bank Te Pūtea Matua’s forecast that serious mortgage arrears, where borrowers are behind on three months of repayments, will rise throughout the rest of the year, and all three chief executives concur.

Part of the reason for that is that there are still around 15% of households with home loans who are yet to move onto higher rates.

Westpac chief executive Catherine McGrath said: “We have been focused on early and proactive outreach, contacting more than 51,000 home loan customers who were due to re-fix at higher interest rates in the past six months, as well as more than 1800 customers we identified as at most risk of financial stress,” Ms McGrath says.

ANZ chief executive Antonia Watson expects more home loan borrowers to fall into serious arrears.

Executives from the banks speaking at the Retirement Commission’s conference revealed some of the strategies they were using to identify people whose financial capability was low.

Westpac’s head of consumer banking, Mark Street, said the bank used customer data to calculate a financial capability score for each of them.

It developed it during the Covid pandemic, he said.

It looked at both their ability to cope with short-term shocks, like sudden car repair bills, and long-term shocks like losing their jobs.

“Our approach was to turn that into a proactive conversation, to say how can we help,” he said.

It’s behind-the-scenes stuff, with Street admitting after being questioned by an audience member that the bank did not tell people that it was calculating the scores, or what individual scores were.

Banks have faced a greater deal of scrutiny over their profits, and their seemingly gravity-defying ability to almost never make a loss, regardless of how the country’s households and economy are faring.

Monday, Tuesday and Wednesday will see the Commerce Commission holding a conference into competition in the retail banking market, hearing evidence from banks, and their critics.

Exactly how the public feels about their banks, and whether their satisfaction for them is growing, or reducing, is a moot point.

Consumer NZ chief executive Jon Duffy says ‘If you don’t rate your current bank’s service ... find a provider that better suits your needs and switch.’

Consumer tested that satisfaction last month, and found ANZ ranked third behind the much smaller, locally-owned Cooperative Bank and TSB. Kiwibank ranked fourth, with BNZ and ASB tied behind them, and Westpac at the bottom.

Consumer said of the ANZ customers it surveyed, 63% rated their level of satisfaction with the bank an 8, 9, or 10 on a scale running from zero to 10.

Consumer asked people what it was that upset them about their banks, and it was clear things like value for money, call centre wait times, how pleasant it was to deal with bankers, and the usability of digital banking features were all determinants of satisfaction.

Jon Duffy, chief executive at Consumer NZ, identified a concern that poor bank performance did not appear to result in a loss of market share.

Westpac chief executive Catherine McGrath is hoping to one day see her bank no longer ranked as the worst for customer satisfaction.

“We’re really concerned when we see an Australian-owned bank like Westpac, which holds almost 20% of the market in New Zealand, with the lowest levels of customer satisfaction,” he said.

“Something isn’t working properly in this market if customers aren’t switching to banks with better service.”

Data released to shareholders of Westpac showed it had actually gained ground on the other big banks in the past year when it came to customer satisfaction, though it remained the lowest-ranked for net promoter score (NPS).

An NPS is the percentage of their customers who would recommend a friend join their bank, minus the percentage who would tell their friend not to bother. Westpac’s NPS was just 15 in March compared to between 19 and 35 at the other big banks.

Westpac’s score a year before had been just 9.

McGrath said the bank was feeling pretty good about the direction of travel it was on, but said there was clearly still more work to do.

“I can see some of the service improvements we are making, and some of the features that we are starting to drop into our app, are being recognised by customers,” she said.

“But plenty more work for us to do, because I would really like us to be not at the bottom.”

She acknowledged its digital experience at Westpac needed to improve. Customers had responded to being able to set PIN numbers through the bank’s app, rather than having to go into a branch.

Watson said a key determinant of satisfaction for individuals is their most recent human interaction at their bank.

Ironically, BNZ’s net promoter score actually fell since March last year, despite the bank telling shareholders it had halved call centre wait times, and seen a significant reduction in complaints.

While banks can take steps to improve their services, there are some things that make bank customers grumpy that are beyond their control.

“When times are tough and you are feeling a bit of a squeeze, which many, many of our customers are doing, you are a little bit less inclined to be positive,” Watson said.