The Banks Are Ripping Us Off!

(Part Ⅰ)



Written by Dr Don Brash

Every now and then, there’s a surge of concern, sometimes even anger, at the banks. They make too much money. Their profits go overseas. They no longer provide services in country towns. Their culture needs watching carefully by the regulators, lest they exploit their customers. They should be subject to more controls.

I’m a bit hesitant to discuss these issues because I can too easily be accused of having a conflict of interest. I am currently chairman of the New Zealand subsidiary of the Industrial and Commercial Bank of China (ICBC), the largest bank in the world by assets (some US$3.6 trillion). Moreover, much of my career has been involved in the banking sector in one form or another. I was an economist at the World Bank in Washington in the late sixties. I was the chief executive of an investment bank in the seventies, and of Trust Bank in the late eighties. I was Governor of the Reserve Bank of New Zealand from 1988 to 2002. And after leaving Parliament I was for a few years a director of the ANZ Bank in New Zealand. At least it can be said that I know the sector well – from the point of view of the banks and of the bank regulator! Banks in New Zealand certainly tend to be pretty profitable. Or more correctly, the big four Australian-owned banks tend to be pretty profitable. In the latest period for which data were to hand when this column was written (ended 30 September 2018), the least profitable of the big four (Westpac) earned a profit of 13.4% on shareholders’ equity. The other three – ANZ, BNZ and ASB – earned between 15% and 16% on equity. By international standards, that is a very good level of profitability.

The smaller banks are not nearly as profitable, with Kiwibank’s return on shareholders’ equity being just 8.4% and TSB’s just 8.1%. And while the big four Australian-owned banks are certainly generating a good rate of return on shareholders’ equity, they are by no means exceptionally profitable in the New Zealand context. Data from the Deloitte 200 list of companies show that, in 2017, PGG Wrightson earned 16.4% on equity, Mainfreight 16.5%, Air New Zealand 18.7%, Restaurant Brands 19.4%, Spark 25.1%, Ryman Healthcare 23.9%, Freightways 27.0%, Fisher & Paykel Healthcare 28.1%, Hallenstein Glassons 30.2%, Briscoes 32.2%, Z Energy 38.3%, A2 Milk 48.4%, and Zespri 48.7%! It is often assumed that banks could substantially reduce the interest they charge on their lending, or pay more than the “miserably low” interest they pay on deposits, but in fact the margin between the interest banks earn on their loans and pay on their deposits (and other funding) is typically just a smidgeon over 2% (between 2.1% and 2.3% for all the big Australian-owned banks in the latest period). For Kiwibank the margin was 2.2% in the latest period, and for TSB 1.9%. After taking all the costs of running the banks into account – the cost of staff, premises and technology for the most part – the Big Aussies earned between 1.1% and 1.3% after tax on their total assets. For Kiwibank the figure was just 0.6% and for TSB 0.7%. Not a huge scope there to charge less on loans or pay more on deposits. Would New Zealand be better off if the Big Aussies were less profitable? Perhaps if they were marginally less profitable New Zealanders would be marginally better off – we might receive very slightly more in interest on our deposits or be charged very slightly less on our borrowings. The government would also receive less tax revenue. But too much less profitable and we would find the banks unable to seek more capital from their Australian parents and start being constrained in their ability to meet the community’s demand for borrowed funds. New Zealand got through the Global Financial Crisis in much better shape than most countries did partly because our biggest export markets were China and Australia (itself heavily dependent on the Chinese market) and partly because, unlike what happened in the US and Europe, our (Australian-owned) major banks remained in a very strong position, able to continue providing credit to New Zealand borrowers. We would have been in much worse shape had those banks had to tightly constrain their lending activities. But isn’t it appalling that all our big banks – and indeed many of our smaller banks – are owned overseas, meaning that all the profits of those banks flow out of the country? Certainly, the profits made by foreign-owned banks accrue to their foreign parent banks, just as the profits of all other foreign-owned businesses accrue to their foreign parents. But of course, most of those profits are in practice re-invested in New Zealand to facilitate further growth. And yes, it would be nice if those profits flowed to New Zealand shareholders rather than the shareholders of the foreign parents (though of course in a great many cases New Zealanders own shares, directly or through KiwiSaver, in the foreign parent banks), but that is just like saying if only I had saved more in my youth I would be wealthier now. The reality is that foreigners put up the capital to establish banks in New Zealand, or to buy banks in New Zealand at a price which their then shareholders felt was a very good deal (government in the case of the BNZ for example, and the community trusts in the case of Trust Bank and ASB). Foreigners are surely entitled to earn a profit on their investments, just as New Zealanders are entitled to earn a profit when they buy shares abroad (directly or indirectly, when New Zealand companies themselves invest abroad). There is much more that can be said about our banks: Do they have an obligation to provide banking services in rural areas? Do the banks have a “culture problem”, as the recent report by the Reserve Bank and Financial Markets Authority suggests? Should the banks be subject to tighter controls by the Reserve Bank? Those are subjects for next month’s column. Part 2 next month...


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