Commerce Commission to provide preliminary report on competition in the banking sector by August as market study gets underway

By Rebecca Stevenson & Dan Brunskill

The Government is directing the Commerce Commission to investigate competition in the personal banking sector which has consistently earned a higher return than banks overseas.

Finance Minister Grant Robertson says it's important that New Zealanders can trust their banks. 

“The cost-of-living is top of mind for many Kiwis and we need to ensure there’s a competitive market among banks providing personal loans, mortgages, credit cards and other banking services so that people have confidence they are getting the best deal possible when doing their banking,” Robertson says. 

Four major banks make up about 85% of the mortgages and have a 90% share of total bank deposits. These banks have consistently made strong returns for the past 30 years. 

Robertson says there hasn't been an in-depth look at competition issues for some time and NZ's lagging behind Australia and the UK, which have done detailed analysis. 

Commerce Minister Duncan Webb says the market study will focus on examining barriers to new competitors entering or expanding in the market, the introduction of innovative products and services and consumers’ ability to switch between banks.

“As part of the study, the Commission will examine banks’ profitability and other financial measures to assess competition in the sector,” Webb says. 

The full study will be completed by the end of August 2024 and will determine any actions that might be needed to ensure the sector is competitive. 

However, a preliminary issues paper will be released in August this year and will describe the structure of the industry and provide early indications on the nature of competition. 

“It will set a clear signal of direction for the study and may uncover discrete issues which the Government could take steps to resolve, ahead of the final report,” Webb says. 

The Reserve Bank says large banks have been more profitable than the rest of the sector and similar sized banks in comparable economies. 

It says the difference in risk-adjusted profitability may reflect a lack of competition, but could also be down to other factors such as cost efficiencies, tax treatment, or product mix. 

The benefits of having profitable banks was apparent in the current environment, as strong banks were better able to manage economic stress and help customers. 

“Importantly, profitability allows banks to support their customers by taking a long-term view in times of stress,” the central bank says. 

Net interest margins have climbed dramatically as interest rates have risen over the past couple of years. 

Banks to 'engage constructively'

Roger Beaumont, Chief Executive of bank lobby group the New Zealand Banking Association, says the Commerce Commission probe will ease any concerns in the community about competition and innovation in the banking industry.

"Our banks are transparent, and will engage constructively with the Commerce Commission,” says 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."

"Switching banks is easy. Your new bank can arrange everything including transferring your funds from your old bank and setting up your recurring payments to your new accounts. This can be done within five working days, and you don’t even need to talk to your old bank," says Beaumont.

 “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."

"We hope the Commerce Commission will look closely at the regulatory environment as part of its study," Beaumont adds.

ANZ Bank New Zealand Chief Executive Antonia Watson says a competition study is "a good opportunity to provide facts in what can be a complex area". She says the bank hopes the study improves the confidence New Zealanders have in the banking sector, and ANZ was committed to contributing to the market study in a proactive and transparent manner.

“New Zealand has a highly competitive banking sector with banks of all sizes and ownership structures, including a government-owned bank. However, with cost-of-living pressures rising, it is understandable that reviews such as this take place.”

Mark Wilkshire, Chief Executive of The Co-operative Bank, says it supports competition within the NZ banking industry because of the potential for increased competition to create a better deal for customers.

'Cynical'

Andrew Bayly, the National Party’s commerce spokesperson, says it's cynical to launch a market study just before an election and after blocking a parliamentary inquiry.

“Everyone wanted to do it expect for Labour, and now they want to make it so close to the election but the results won’t be available until after the election, it looks like a bit of a stunt,” he says.

National leader Christopher Luxon says a select committee process would have been a quicker way to assess competition issues and follow up with a market study, if needed. 

“We want to ask the questions, that’s why Nicola [Willis] and I were talking about that several months ago and we could have got that in a select committee,” Luxon says. 

Willis, the party’s deputy leader, says previous Commerce Commission probes hadn’t delivered much for New Zealanders. 

“Something’s better than nothing. We welcome this as a belated step forward, we would’ve liked to see action earlier and more wide-ranging,” she says. 

HSBC's recent decision to end retail banking raised questions about regulation as well as competition. 

“There are things about the New Zealand operating environment that could be adding costs to New Zealand bank users”. 

One example is the Credit Contracts and Consumer Finance Act regulations which have increased costs for consumers and made it harder for low income New Zealanders to access credit, National says.

'Act now'

The Green Party is welcoming news of the market study, but urging the Government to act now and raise the corporate tax rate.

“Banks have made eye watering record profits recently due entirely to circumstances out of their control, while low income people in Aotearoa spend more and more of their income on essentials. A market study will be useful, but the time is now to lift every single family out of poverty through our Income Guarantee and to pay for it with a fairer tax system,” says the Green Party’s finance spokesperson Julie Anne Genter.

“The Green Party has been pushing for an inquiry into bank profits for almost two years and we’re pleased the Government is finally taking action. However, it should not take an inquiry to realise that we have thousands of people struggling to cover the basics, while huge banks are able to line the back pockets of their wealthy shareholders."

“Our Ending Poverty Together plan would redesign the tax system, including increasing the corporate tax rate back to what it was over 10 years ago," says Genter.

Strong profits

New Zealand's banks' combined annual profit surged by more than $1 billion between October 2021 and September 2022 as margins rose, topping $7 billion for the first time, according to KPMG's annual Financial Institutions Performance Survey released in March. 

Of the 20 banks included in the KPMG banking report, 16 recorded an increase in profit.

The report also showed ANZ NZ, ASB, BNZ and Westpac NZ dominate banking in New Zealand, with a combined market share of 90.05%.

A union for bank staff said in March it supported a probe into bank profits.

First Union researcher and policy analyst Edward Miller said that a decade’s worth of data from the World Bank showed New Zealand banks’ returns on equity were among the highest of comparable countries.

The union said there should be a 5% levy on bank profits. 

 How much is too much?

The Commerce Commission has completed three market studies initiated by the minister looking into how markets were operating for residential building supplies, supermarkets and retail fuel.

A key battleground in the supermarket study was about return on average capital employed (ROACE), or how much a business earns compared with how much money has been invested in it, and the value of the assets used to generate returns.

This calculation was also used in the fuel study, and was one of three profitability measures the regulator relied on in determining the grocery market was not working well. The commission found "the major grocery retailers achieved higher levels of profitability than we would expect in a workably competitive market".

The final Commerce Commission report estimated the major grocery retailers earned ROACE of 12.8% for Foodstuffs South Island, 12.7% for Woolworths NZ, and 13.1% for Foodstuffs North Island, averaged across 2015 to 2019.

The Commission said these returns were well above its estimate of a normal return for grocery retailing in New Zealand of 5.5%.

Drafts of the report had estimated ROACE of between 21.6% and 23.8%. 

For the banks, the conversation about return on equity (ROE), or the return shareholders get compared with profitability, has already begun.

Author of the KPMG report, John Kensington, told media after backlash to bank profits that the New Zealand banking sector had a ROE of 13.4%. He said bank profits were reasonable when compared with the return on equity of other large New Zealand companies.

In 2022, BNZ had an ROE of 13.5%, Westpac 12.66%​, ANZ 14.79%​, and ASB 15.16%​.

The Australian parent companies have lower ROEs;  ANZ Australia reported 10.4%​, Westpac 7.5%​, NAB (which owns BNZ) reported a return on equity of 11.7%​ and ASB’s owner Commonwealth Bank was 12.7%​, for 2022.