Rebecca Stevenson says as a customer, TSB feels like a small bank stuck in a hard place

I never paid much attention to my bank’s financial performance. Until it dropped.

TSB’s latest financial result is a bit of a stinker, and I can’t say I saw it coming. But I should have.

Let's rewind to June 2022. Then, the now-outgoing CEO Donna Cooper was heralding TSB’s great leap forward, with the little Taranaki-bank-that-could, “hitting its stride” and an improved profit performance of a little more than $38 million after tax after “12 months” and “brave decisions”.

Cooper said the bank’s focus and investment in the past three years, and last 12 months in particular, "was required to set the bank up for the future".  Cooper said the bank had dealt with a major compliance uplift, significant systems and technology upgrades, COVID-19, and considerable regulatory developments. It spent $136m on those upgrades.

“We’ve had a massive amount of work to do, but now we’re ready to springboard into a new era of profitable growth and innovation,” said Cooper.

TSB’s charm is in its small bank, can-get-someone-on-the-phone, realness. Our bank manager for many years was named Joy, we could call her. Yeah TSB doesn’t have particularly exciting products, but the service is great. Yeah it doesn't have many branches and they're quickly diminishing to almost none, but what do you need them for, nowadays, anyway?

This was all fine. But I can’t help but feel that perhaps there is a comfort in being with a big bank, with their big profits, big balance sheets, diversified risks (operating in NZ and Australia), and listed company status which means a swift flow of information such as when a bank has a problem, or, its been party to a hack.

TSB hasn’t been covering itself in glory lately. It feels from the very outside like a bank under pressure. In December, I was one of its customers who were the subject of a third-party hack, with my phone number, name and account number at risk. The bank sent one email, on December 16. I can't say I remember reading it; that was my last day in the office for the year.

The bank also swapped its cards from Visa to Mastercard in 2022, which did not go off without a hitch, and led to automatic payments bouncing across many months, and phone calls and emails to sort out bills including with my health insurance provider. It took me weeks to work out what was going wrong. There was not a word from TSB about the issue.

Even Cooper’s exit has been strangely handled to an observer; someone in Stuff’s Taranaki newsroom seems to have got wind she was out and a story was published on a Friday with no fanfare and seemingly no sense of obligation from TSB to, you know, tell everyone about it? TSB then pumped out a press release on Tuesday the following week.

This kind of behaviour would never fly if it was a listed company. Like the big banks.

It is no secret TSB, and New Zealand's small banks and even the big four, have been struggling or working hard (pick whichever description best describes your bank) to keep up with regulatory changes and rising cost imposts, as the industry is fond of saying.

The Credit Contracts and Consumer Finance Act (CCFA), and rolling maul of tweaks to it, has been a financial burden for smaller banks in particular.

Massey University banking commentator Professor David Tripe says smaller banks are less able to keep up with the regulatory burden; they have fewer customers to spread these increased costs across, and less money available to upgrade technology, let alone innovate or offer new products and services.

TSB’s latest result is more evidence of the regulatory burden it is clearly struggling with.

In 2023 net profit after tax fell 48% with expenses more than blowing out. Operating expenses alone increased 39%, or by more than $53m, to more than $189m.

TSB also dropped this clanger: other expenses rose to $30.483 million, up from $12.408 million the previous year. So much for that profitable, juicy future predicted 12 months ago.

The increase in other expenses was due to TSB undertaking a review of its products and services, the bank said. 

“Provisions have been recognised where this review has identified areas that may result in financial loss and the costs can be reasonably estimated.”

Again, the CCCFA is fingered as a potential culprit, with TSB stating that as part of work to implement changes to the act, it reviewed processes around consumer credit products which had identified "some areas requiring attention". 

It was, "working through the detail of remediating customers as required". 

None of this is comfortable reading as a TSB customer.

There has been a intense focus on the enormous, stupendous profits of New Zealand’s big four banks.

But a small bank profit, eroded by 48% in one year, weak margins and a poor return on assets – how do we feel about that?

The Reserve Bank of New Zealand’s (RBNZ) bank dashboard shows TSB has the reserves to withstand tough times, as all the main NZ banks do, holding well in excess of the RBNZ minimum total capital requirements. This has been another area where the regulator has been active in banking, with RBNZ cranking up capital adequacy ratios.

Profitability sees TSB fall to the back-of-the-pack in the latest data, with a 0.1% return on its assets for the quarter ended March 31, 2023. Only the Co-operative Bank fared worse.

Bank profits, after a stonking run, are tipped to start tightening as higher interests rates slay the mortgage golden goose. Banks are now scrapping for new loans, and rumours abound of mortgage lending teams under pressure.

KPMG's most recent bank performance review found bank profits were already decreasing, falling 13% for the quarter ended March compared with December 2022, as banks start preparing for tougher times. 

It faces real challenges in the mortgage market and the economic climate wont help out this time. TSB's mortgage lending accounts for 87.5% of its total lending, although board chairman Mark Darrow says lending and deposits "continue to show growth".

KPMG found new mortgage lending fell 28.3% for the March quarter compared with the December quarter. It warned that more people are struggling to pay their debts, banks including TSB will need to write off bad credit, and as more people re-fix their loans and mortgages throughout this year, more will see their finances unravel, impacting the banks' finances too.

Darrow says TSB has a strong capital and liquidity position, considerably in excess of the RBNZ regulatory requirements, and a credit rating of A- with a stable outlook from international ratings agency Fitch, "the highest rating for a regional bank in New Zealand". 

Compare its assets, and TSB is just small. It has about $9.1 billion total assets compared with NZ’s largest bank ANZ’s outsized $188.9b, or Rabobank at $15.4b or Government-owned Kiwibank at about $33b.

Liquidity, here TSB does well, with plenty of stable funding underpinning its finances.

But the next graph on the central bank dashboard is less rosy again. This one shows TSB’s lending is more concentrated across fewer customers than three-out-of-the-four big banks, at 54%. The higher this number is, the more concentrated the lending.

ANZ also reported another gigantic profit this year in New Zealand, even though it fell as it is already starting to write off debts.

In terms of profitability it's a beast too, returning a full 1% on its assets for the March quarter, with two of the other big four - BNZ and ASB - returning 1.2%.

TSB is also the minnow in terms of performance for its owner the Toi Foundation, left in the shadow of its other investment; Fisher Funds.  The Toi Foundation's 2022 accounts show Fisher contributed $56.1m in income while TSB was responsible for a $12.5m payout.

This year it will be $10m, Darrow says, and "the expectation and intent is that dividends will continue to flow as normal".

Attempts to talk to TSB about banking are difficult; at a time when there is a banking competition study, and intense focus on banking competition where you would think the bank had something to say, if not a story to tell about how it is a strong competitor in the market, it has been all but silent. It is often lethargic in dealing with media enquiries.

Perhaps there is merit in what I presume is a head down, bum’s up trying-to-bloody-deal with the CCCFA approach. 

When you start to look at TSB a bit more closely, it does feel a bit, well, provincial. There are no former prime ministers on this board. TSB appears to have second-tier lending experience more than anything else.

The fact also is that what the banks, commentators, and industry reps like the Banking Association have been saying about regulatory impost on the industry is true. It's hard out there for a small bank. TSB is feeling it, and paying for it. 

What's worrying is the lack of front-footing and talking to the market, and its customers, about what is really going on. Cooper said in June last year TSB had paid out more than $130m in its three-year fix-it plan and was ready to move on. 

Was this just wishful thinking? What has happened since then to change the bank's outlook? Why can't it seem to get a handle on the CCCFA? 

Cooper's pending departure emerged the day after the bank's annual result announcement. She's scheduled to leave on July 28, and we're being told she'll be spending more time with her young family before seeking her next challenge.

From a customer perspective, I haven’t had an overtly awful experience with the bank. I don't not like it. We've noticed the dropping service. Joy was moved onto something else and most of our banking just happens, and we don't need a lot of attention.

However, I am not sure TSB really has a particularly compelling offer, or story, in the market anymore. We took up a credit card offer somewhere else last year. TSB had nothing to tell us, at all, when we were shopping around.

Those regulatory changes and costs aren't going to abate. The new bank conduct regime, prompted by Australia's Royal Commission into the big four which spurred our conduct and culture review, has spawned legislation. And TSB will now need to demonstrate it can also meet those new fairness conduct obligations. 

If I was weighing up my bank, against this backdrop of economic turmoil, and ongoing costs and rising headwinds, I might want a bank with a beefy balance sheet, thanks.

I am not saying I am moving bank, of course. Have you seen what you need to show to get a mortgage with the new CCCFA regs?

TSB, of course, says its customers have nothing to worry about. Darrow says customers can be assured TSB is in a sound financial position, and customer satisfaction remains very high.

Its board was also very strong, he says, undergoing a significant refresh with two new appointments in 2022, (with a new board chair and deputy chair appointed), and a further three new appointments in 2023.

Yet, I can't help but feel maybe a big four bank has merits. I would love TSB to show me differently.