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Opinion: Why Parliament's attack on banks is wrong on 8 counts
By Bernard Hickey The Finance and Expenditure Committe's report on bank profits and interest rates sure caused a stir, mostly because it carried a whiff of officialdom and cited various comments from the Reserve Bank. The New Zealand Herald led with it and for at least a day it has dominated the news agenda. The noise is likely to spill over into the Reserve Bank's June quarter Monetary Policy Statement and Official Cash Rate announcement. But is the report based on fact? Are the criticisms valid? Most have assumed they are because it's an 'official report' based on comments from the Reserve Bank. But I think those assumptions can be criticised. Here's how I think the report is wrong on 8 counts.
1. Bank profits have fallen substantially, not marginally Here's what the committee said.
"We were very surprised to learn that despite the severe impact of the current recession on business and household liquidity, bank profits declined only marginally in the past year, and principally as a result of provisioning against future credit losses." The committee said it "would expect that the banking sector would take on a greater role in sharing the burden of the current recession."
This is wrong, particularly when you take into account the latest reports from the banks for periods up until March 31. The committee used referred to comments from the Reserve Bank based on data until the end of December. The latest reports show a significant fall in profits. Here's a breakdown of how the big four Australian-owned banks did up until March 31. ANZ National ANZ National's profit fell 29% to NZ$488 million in the six months to March 31 from NZ$692 million in the same period a year ago. It's net profit as a percentage of total profits fell to 0.8% from 1.1%, according to NZ National's Key Information Summary ANZ National's bad debt charges rose to NZ$285 million from NZ$93 million. ANZ National's total lending rose 1.2% from a year ago to NZ$93.72 billion. ANZ National reported its net interest margin for its New Zealand businesses fell 24 basis points to 210 basis points in the six months to March 31 from the same period a year ago. It was down 9 basis points from the September half. ASB ASB's net profit fell 26% to NZ$419 million in the 9 months to March 31 from NZ$567 million in the same period a year ago. Net interest income fell 4% to NZ$712 million from NZ$741 million. Yet it's lending (advances to customers) rose 14% to NZ$52.40 billion from NZ$45.95 billion a year ago. Net profit as a percentage of assets fell 30% to 0.7% from 1.0% the previous year according to ASB's Key Information Summary, yet its tier one capital ratio rose to 9.0% from 8.9% a year ago. Bad debts rose to NZ$147 million from NZ$18 million in the same period a year ago.
2. Bank profits are down because of margin contraction, not just bad debt charges Here's what the committee said:
"We were very surprised to learn that despite the severe impact of the current recession on business and household liquidity, bank profits declined only marginally in the past year, and principally as a result of provisioning against future credit losses."
The figures above show that a major portion of the fall in profits was linked to margin contraction. Banks are paying between 150-200 basis points more for their NZ$100 billion of overseas funding, particularly as they begin to lengthen the maturity of this debt at the request of the Reserve Bank. Also, banks are fighting hard with each other to attract term deposits, which are now offering rates significantly above the Official Cash Rate. That is squeezing margins further. 3. Banks have lent substantially through the Recession and have not tightened credit supply, They have expanded lending sharply. Here's what the committee said:
"The Reserve Bank noted that banks' behaviour tends to be pro-cyclical-providing easy access to credit in booms, tightening credit supply in downturns."
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The banks have increased lending by 6% or more than NZ$17 billion in the last 12 months. Bank lending in America, UK and Europe has fallen sharply in some cases over the same period. The strength and continued lending of our banks has ensured our recession has been been relatively mild and our unemployment remains significantly lower than in the US, UK or continental Europe. Australia has been the best performing western economy in the last 6 months. That is no accident. It has the same banks as New Zealand. 4. Banks have passed on most of the OCR cuts to borrowers
"We are concerned that some banks have not passed on the latest 50-basis-point cut to the official cash rate (OCR) in their interest rates for floating mortgages. The Reserve Bank was disappointed at the response of the banks' floating mortgage rates to the latest OCR cut "” only two major banks, Westpac and ANZ National, have reduced their floating mortgage interest rates significantly," the Committee said, adding however that a large portion of the 575 basis points of cuts since mid 2008 had been passed on.
The committee's last caveat is accurate and undermines its basic argument that rate cuts have not been passed on to mortgage rates. Floating mortgage rates have dropped around 440 basis points to around 6.4% while the OCR has been cut 575 basis points. People should remember the OCR has been cut to a record low and significantly lower than it's ever been. The last cut was not passed on, but it was a cut in the OCR from 3% to 2.5%. 5. Banks have sacrificed profits to keep term deposit rates well above the OCR People also forget that the other side of the rate cutting coin are the cuts in term deposit rates. Six month term deposit rates have dropped only 400 basis points and have been rising slightly since January, despite significant further cuts in the OCR. This is squeezing bank margins because deposit rates are now significantly above the OCR. The margin between the 6 month term deposit rate has blown out to around 150 basis points from less than 15 when the OCR was 8.25%. 6. The government is not subsidising the major banks with the guarantees
"In view of the relative resilience of profits in the banking sector, we are concerned that taxpayers are, in effect, subsidising banks through the Government's retail deposit guarantee scheme."
This is simply not true. The big banks pay a fee of 10 basis points for the retail guarantee. Over the two years of the guarantee the banks are likely to pay a combined NZ$135 million in fees for a guarantee they don't think they need. The guarantee was foisted on them at a time of unprecedented financial turmoil because Kevin Rudd has a rush of blood to the head one weekend. The great irony (and it's a painful one for banks who have not lost a single dollar of deposits) is that they pay a fee but finance companies don't. 7. Australian-owned banks are not treating New Zealand and Australian customers differently
The Committee also said it was vital the "Australasian banks treat Australian and New Zealand firms on an equal footing."
The Reserve Bank is watching this issue, but has said businesses on both sides of the Tasman are finding it harder to get the easy credit they obtained before the credit crunch. 8. Bank profits are down just as much as other corporate profits As detailed above, bank profits have fallen as much other businesses. This persistent view that bank profits are rising or flat is simply not true. The numbers above show that. The committee knew it could make some popular claims and not have to back it up with legislative proposals that would have to be challenged in the court of public opinion and in parliament. Finance Minister Bill English said as much earlier today when he said customers should use their power as consumers to express their disproval. That can be translated as English knowing he either does not want to or can't change the rules to force the banks to cut rates and profits.
What's their angle? Clearly the
What's their angle? Clearly the government must know all of these facts. To what end are they pandering to the masses by portraying the banks as villains? They've only recently been elected.
Bernard - useful work and
Bernard - useful work and report.
Could you comment on my comment/questions asked here please:
http://www.interest.co.nz/ratesblog/index.php/2009/05/14/have-your-say-n...
"Bernard, good on you for calling, "that the banks should end their cross subsidising of fixed mortgage rates with relatively high floating rates." However, I think given (sorry to be tediously boring Bernard) you have observed, and stated elsewhere:
"banks have increased their margins sharply for business loans but have left them reasonably low for mortgage lending, creating a cross subsidy."
Given your independence and platform, that we continue to support with our mouse-clicks, should you not as well also start calling for this to end, perhaps providing some approriate analysis to substantiate, and also include comparison of before and after behaviours across the Tasman?"
The "across Tasman" comparison you have addressed to a degree, but you may be able to comment on the "before and after behaviours" aspect more precisely now you've looked at this in more depth.
Thanks, Les.
In regards to point 4...
In regards to point 4... OCR has been cut to 2.5 %... short term deposit rates are 3-4%...
Floating mortgage rate is ... 6.4%...
Is ..."passing on the OCR rate cuts"... the way to look at it..????
575 basis points verses 440 basis points may not be the way to judge how much of a "sacrifice" the banks are making....
Like any business Banks "buy wholesale and sell retail."
If wholesale is 2.5% and retail is 6.4%... then their markup is 256%
If Wholesale is 3.3% and retail is 6.4%.... Then their markup is 194%
If Banks are making "Sacrifices".... then I'd like to see their margins on a good Day.
If I have got this wrong... someone let me know...
Les: What platform? is this
Les: What platform? is this a political platform website? or a financial information website?
As for cross-subsidising, a business is usually made up of different facets....some more profitable than others....its the nature of a business to try and maximise each and every one of those but where a business thinks a facet maybe profitable again in the future to cross subsidise it short term from somewhere else that can stand it....
I assume the "committee" is trying to deflect the agro from the pain ppl are suffering by offering up a scape goat(s).....a nasty business who rips us poor minions off....reality check here....the Pollies take quite a bit of the blame for the situation we are in....(of course so do we) they oversaw the current global debacle...yet appear to have done nothing....very poor leadership from our leaders....IMHO....(which ever political party, same, same.) Banks are suffering loss of margins, some CEOs are taking a pay freeze.....and MPs are doing what to show their solidarity with us?
regards
roelof: They dont buy at
roelof: They dont buy at 2.5%.....there are a lot of docs here let alone elsewhere explaining that the wholesale rate plus insurances and risk margins etc etc add up over 7%....hence why the 5 year is now 8%.....
Floating should come down, however us floaters (who I think are in a minority) are subsidising the fixed which are probably making nothing....I dont agree with that but as long as all the banks are all about the same floating rate then there is nothing I/we can do (ie move).....
regards
Steven - thanks for your
Steven - thanks for your response, you make some interesting points. I'd like to respond to them. I'd rather wait till Bernard has responded to my question.
Was thinking communication platform.
Cheers, Les.
Steven...Thanks .... my comments were
Steven...Thanks .... my comments were a little bit..dumb
I can understand long term fixed motgages might cost 7 %....
BUT would u say the floating rate is funded thru the short term deposit markets..???
If so, then there is very little extra cost to the banks... since they don't have hedge in the exchange rate..??
Would u say they are doing well with the margin on the floating rate..???
( especially with the commitment the Reserve Bank gave in holding the OCR rate for the medium term)
As far as floating mortgages subsidising longer term fixed mortgages... Who can know..??? Could be any reason for the big difference in Banks profits from the 2 tow products....???
cheers
Roelof
Bernard Firstly you're link is
Bernard
Firstly you're link is to to ANZ National's 2008 GDS (not much help justifying the argument!), so looking at ASB's numbers - their total income rose from $1.049b to 1.148b in the 9 months to 31 March 2009 over the previous year - that actually almost a 10% INCREASE. Their net interest earnings was down about 4% but this excludes profit the bank made from any hedging.
After taking impairment losses into account ASB income was down only $30m on the same period last year despite writing off an extra $129m in bad debts. This hardly supports your view of 'hard done by bankers'. To adapt YOUR turn of phrase: BANKS have 'made off like bandits' in recent years and shouldn't expect to recoup losses from loans that they made turning toxic AND maintain the same high profits.
If you look properly at ASB's figure Bernard, although advances to customers may have been up 14%, interest bearing assets were only up 8.8% which is less than the nearly 10% increase in total income income! As I've mentioned before - in a lower interest rate environment you would expect investment income to be down as the banks received less interest on funds that they have in short term bonds and deposit with central banks - but it seems that they have more than made up for this through income from fees! (Making off like bandits again Bernard!).
So I think that the Finance and Expenditure Select Committee are 100% on the money and you Bernard are, sadly yet again wrong. (Much like those predictions of 30% nominal house price falls - time to scale back your predictions Bernard? - like Dr Bollard did this morning.)
Chris_J - sounds like you
Chris_J - sounds like you know what your'e talking about, so I'll ask you, re. the written-off bad debts, are they 'terminally' written off, as it were, or could any of them re-appear back in the black at some time in the future, say when no one's looking that hard? Or is this where 'provisions for bad debts' are written, but not disclosed? I don't know and would really like to, so grateful for any help you can give please.
Cheers, Les.
Chris J My apologies with
Chris J
My apologies with the link. It is now fixed.
There is no argument when you look at net profit as a percentage of average assets, which is the number the Reserve Bank uses. That has dropped 30%. Sorry, but that's significant.
The same is the case with ASB. That number has dropped 30%.
We'll have to agree to disagree on this. Only Westpac has reported higher net interest margins in the March quarter.
FYI this as well
http://www.interest.co.nz/ratesblog/index.php/2009/05/28/anz-sees-even-t...
Les Rudd Impairment losses include
Les Rudd
Impairment losses include both provisions for bad debts and actual written off debts (sorry about the slightly erroneous statement in the previous comment), so yes if the economy improves, some of the impaired losses could re-appear in black on the income statement.
Out of interest, ASB wrote off $31m in bad debts and recovered $3m (but remember there was only $10m extra made in impairment provisions in 2008, I know we can't really draw too many conclusions from that but that does show a recovery rate of 30%).
So of their $147m only $28m was actually totally "gone".
So they increased bad debt provisions by $119m - nearly doubling their total bad debt provisions from last year. If they had made more (perhaps more reasonable) provisions in previous years then we wouldn't now have the current situation of the reported earnings declining so sharply that the banks (and Bernard) can show some net earnings figures and cry that they are hard done by.
Assets past 90 days due are up from $124m to $386m but most of this is residential mortgages ($294m) which should in large part be recovered. Personally I'd be surprised if actual losses for next year were anything like even half of the increased provisions for this year, especially given that the residential property market is clearing and interest rates are still significantly lower than this time last year.
I don't think that there will be a rush to reduce the impairment provisions (especially not the collective provisions) but there may be some black ink on the income statement next year from individual impairment provisions that have been made for particular advances.
Perhaps another interesting way of looking at the numbers for Bernard - if you only consider actual bad debts written off then ASB's operating income was up from $1.041b to $1.12b just a 1% fall as a percentage of total interest bearing assets - not as bad as the Bernard's 30% fall suggests.
I'm sure sure Bernard won't agree, but it's amazing how many ways you can interpret the same set of numbers, I guess that's why so many analysts got it wrong in 06 and 07!
Chris_J - thank you very
Chris_J - thank you very much for the time you've taken to explain that. If you can spare a little more time I'd appreciate your opinion/comment on the concern raised here:
http://www.interest.co.nz/ratesblog/index.php/2009/06/10/opinion-why-par...
Cheers, Les.
Thanks Chris J. The Bank
Thanks Chris J.
The Bank spin can't and won't last but the sad thing is the Government won' t actually do anything regardless of the facts. We have a situation where they (Govt) can say things that appeal to the public but can't actually do anything. Well they can but I don't see any real commitment from Bill English to do it.
It's all about Economic Sovereignty. We didn't vote banks into power, we voted for politicians but guess who has the real power? If you don't know ask Bill English as he knows only too well. If you can't get him on the phone then try Dr Bollard or perhaps anyone in Treasury right down to the tea lady. Past policies have given away Sovereignty and it's going to be a long battle to get it back.
It can only start when brave politicians stand up and vote for what is in the national interest and not their respective vested interest groups.
Steven, "As for cross-subsidising, a
Steven,
"As for cross-subsidising, a business is usually made up of different facets"¦.some more profitable than others"¦.its the nature of a business to try and maximise each and every one of those but where a business thinks a facet maybe profitable again in the future to cross subsidise it short term from somewhere else that can stand it"¦."
Savvy logic, to a degree. BUT, if as Bernard and others state, banks are cross-subsidising fixed with floating mortgage revenues it is then blunting mon.pol. (which is as blunt-as anyway) and is working against New Zealand's economic recovery. Are you content with that?
If as Bernard states, banks are cross-subsidising residential mortgages by levying higher rates on business borrowers, how is that helping the 'whole' economy? It's not, it's working against New Zealand's economic recovery, it's 'economic cannabilism'. Are you content with that?
Are you also content with the banks seemingly obfuscating behaviours, that seem so obvious to some, by reporting fin.stats with debt provisions that seemingly reduce apparent net profits thereby disabling the profiteering critisism that many are making?
In the present economic environment these do seem well interpreted as sovereign issues. Why are people apparently not concerned by the implications?
"the Pollies take quite a bit of the blame for the situation we are in"¦.(of course so do we) they oversaw the current global debacle"¦yet appear to have done nothing"¦.very poor leadership from our leaders"¦."
Over a long period of time, I agree.
You guys are getting narrowed
You guys are getting narrowed to the internal commercial banking sector, when the multilayered international banking network is a closed loop network. To assist in undestanding this read from REPORT OF THE ROYAL COMMISSION ON MONETARY, BANKING, AND CREDIT SYSTEMS 1956
http://socialcreditorbust.blog.co.nz/royal%20commission%20report%20banki...
roelof : "BUT would u
roelof : "BUT would u say the floating rate is funded thru the short term deposit markets..???
This is my understanding....
If so, then there is very little extra cost to the banks"¦ since they don't have hedge in the exchange rate..??
This is my understanding....
Would u say they are doing well with the margin on the floating rate..???
This is my understanding....but take it in perspective....there are apparantly few floaters in comparison to fixers and where banks lose on some aspects of their business they make more on others.... So while my nderstanding is floating is more profitable for them there are few....so in $ terms it maynot be that much.
( especially with the commitment the Reserve Bank gave in holding the OCR rate for the medium term)"
Ditto when then offer very good 6 or 12 month rates it locks you in and that benefits them IMHO more than you.
regards
Les Rudd: mon-pol is blunted
Les Rudd: mon-pol is blunted by fixers....Dr Bollard can put up rates as much as he likes if you have fixed for 5 years you dont care...so the few floaters get hammered by the increasing OCR to fight inflation while the rest sail into the sunset...until the 5 year is up of course. As per your second para I dont think economic recovery is due to mortgage rates, more due to businesses borrowing to make profits, if they cant or the interest is too high then they wont, is it the banks fault? Not really I think, they take wholesale lumps of $ just like say a green grocer takes a container of cabbages, split them up individually and make a profit on the margin. So who's making the profit? does not seem to be the banks, Bernard has demonstrated their margins are tightening...."am I content with that?" Im not sure on your point?
"banks seemingly obfuscating behaviours" I dont see it....like I said above...At the end of the day banks work within the regulations and the global markets, they have to borrow abroad at the rates those abroad demand, we need to see their margin bet its bigger than the banks...
"sovereign issues" I get a bit nervious at this comment....I dont see it as fair that a Govn lands on a bank over how they do business and uses a bank as a scape goat or a money bag to cover for the Govn's ineptitude. The Govn should set long term expectations via regulation and leave well alone....buggering up businesses is something Govns manage very well IMHO....especially to defend themselves.
In terms of mon-pol, I am beginning to think its day is done....this is because containing inflation assumes that energy costs are low and not a factor in inflation calculations. Now we are past peak oil and once energy costs become a huge strategic and un-removable factor then raising interest rates to curb costs wont curb costs just kill businesses.
regards
Steven - "mon-pol is blunted
Steven - "mon-pol is blunted by fixers". Agreed and it could be dealt with by controlling volume of money, not just prices as with the OCR. MEA press release linked below and RCR idea here at Number 6 here:
http://www.interest.co.nz/ratesblog/index.php/2009/04/15/opinion-how-tou...
Paras on "cabbages" and "seemingly obfuscating behaviours" - as Chris_J says at June 11th, 2009 at 2:16 pm "but it's amazing how many ways you can interpret the same set of numbers". So I'll agreeably disagree, for now. I'm pretty certain discussion and investigation of this issue is not going away any time soon.
I agree, "buggering up businesses is something Govns manage very well" and "The Govn should set long term expectations via regulation" - policy and tools. See MEA press release linked above, see:
Monetary Policy problems sit with MP's not the banks at http://www.mea.org.nz/media/pressreleases.aspx
"sovereign issues" - A properly run NZ owned bank would be better placed to help NZ businesses, see raf's thinking here:
http://www.interest.co.nz/ratesblog/index.php/2009/06/09/parliamentary-c...
"In terms of mon-pol, I am beginning to think its day is done" Agreed.
Bollard's secret not from Muldoon's
Bollard's secret not from Muldoon's toolbox
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1057...
"But there is one step he could take. Bollard hinted he had the information that would show in gory detail how much "extra" profit the banks were making.
He declined to divulge how much the banks' margins had improved in recent months and how much their funding costs had fallen. It must be very fresh if he does have it.
The Reserve Bank's own figures from its Financial Stability Report last month show that bank interest margins as a percentage of average interest earning assets rose to 213 basis points in the December quarter from a record low of 208 basis points in the September quarter.
This was still below the 217 basis points in the same quarter a year earlier and down from a June 2003 peak of 260 basis points.
Bank profits in the six months to March 31 have fallen around 20 per cent and three of the four banks reported lower interest margins for the period.
The Reserve Bank must have seen a significant improvement in April, May and June. If it has, it should disclose the overall number to the public to embarrass the banks into moving.
Bollard promised the committee he would look at whether he would give them the information. He should give us all the information. Embarrassment may be the best monetary policy tool he has left."
Sad, but seemingly true.
[HT The Chairman, for Herald article.]