Commerce Commission says which bank gets our savings and home loans could reveal whether there's enough bank competition

Home loans and deposits will be the key area of focus as the Commerce Commission investigates, via a market study, whether personal banking in New Zealand is competitive and offers people value and choice.

The Commission on Thursday morning released its awaited preliminary issues report outlining what it intends to dig into as it looks at whether banks’ prices and profits are “too high for too long” because of an inefficient market.

The competition regulator has 14 months to deliver a banking study, with commercial banking left out.

Commerce Commission Chairman John Small says deposit accounts and home loans are an important aspect of how banks compete for retail customers, and are held by a large proportion of New Zealanders.

“We will also consider other banking products to build a complete picture of competition between personal banking service providers.”

The paper says deposit accounts appear to be an important source of funding for banks, and the regulator’s current understanding is that deposit accounts play an important role in how banks attract customers and sell, or cross-sell, other personal banking services.

As at May 2023, deposits accounted for about 62% of registered banks’ total funding, with the combined total deposits of all registered banks $435 billion. 

About $128b was deposits in transaction accounts, $110b in savings accounts and $197b in term deposits.

Home loans are a significant cost to many New Zealanders and there's potentially limited customer switching, the Commission says.

Home loans make up about $348b in overall lending in New Zealand, of which around 86% is provided by the four largest banks. 

“We propose to focus on home loans because …. there is some anecdotal evidence suggesting potential for consumer stickiness and inertia, corresponding to subdued levels of switching.”

The paper says home loan interest rates have significant effects on household budgets. 

For those with a home loan (about 32% of households in 2021), repayments are a significant ongoing expenditure.

The preliminary issues paper says overseas studies have identified home loans as being particularly profitable portfolios for banks.

“We expect that focusing on home loans will help to identify and better understand any factors potentially affecting competition in personal banking. Our initial understanding is that competition for home loan customers is a central arena for retail banking competition more generally, and has an important role in attracting and retaining personal banking customers.”

ANZ, New Zealand's largest bank, said in an emailed statement that it was considering the Commission’s assessment of issues relevant to the market study and looked forward to the opportunity to provide insight into what can be a complex area.

"New Zealand has a highly competitive market for personal banking services with banks and service providers of all sizes and ownership structures, including a government-owned bank. We’re contributing to the market study and hope that it improves the confidence that New Zealanders have in the banking sector."

Industry group, the New Zealand Banking Association, said the Commerce Commission’s preliminary issues paper was comprehensive and shows an understanding of key issues in personal banking.

“In particular, the focus on the significant current regulatory requirements as well as those in train will provide important context to competition and barriers in the industry.”

It said the focus indicated in the issues paper would ease any concerns in the community about competition and innovation in the banking industry.

Banks are in the money

The market study will also tackle the thorny issue of profitability.

The issues paper says New Zealand banks are regarded as financially strong and stable but persistently high profits raise questions about the intensity of competition.

Small says the Commission’s initial review of existing research shows that NZ banks were more profitable than in comparable economies over the past decade, and this raised questions.

“We want to understand whether lack of competition in personal banking is a contributing factor. This is important in the context of our study as profitability can serve as an indicator of the intensity of competition.”

A Cabinet paper published in June says the profit returns made by New Zealand’s four largest banks in the past five years were above several of their international peers. 

The paper says research into the banking sector’s profitability gave evidence of high and increasing profit margins over variable costs, limited susceptibility of profits to fluctuate with higher costs, and greater lending margins and profitability with higher short-term interest rates.

“There is also an apparent lack of responsiveness of deposit interest rates to changes in the Official Cash Rate, compared to a high responsiveness (in an upwards direction) of lending interest rates to changes in the Official Cash Rate.”

The paper points to work from the Reserve Bank’s Financial Stability Report from May this year showing large New Zealand banks generated shareholder returns of on average 15%, compared to 11% for their counterparts overseas.

It also outlines a Treasury report from September 2022 which found nominal bank profits in New Zealand were the highest on record.

“But when measured by return on equity, and return on assets, profitability was near the average for the 2013 to 2022 period,” Treasury says.

The Treasury “ultimately concluded that there was no clear evidence that bank profitability constituted a windfall and did not recommend a windfall tax in the banking sector”.

However, the preliminary issues paper says Treasury’s report “recorded its observation that the four largest New Zealand banks have had persistently elevated levels of profitability compared to the rest of the banking sector on return on equity and return on assets and questioned why competition between the large New Zealand banks’, due to their relatively lower costs, had not resulted in lower interest rate margins and fees”. 

The paper says the Commission had begun by looking at three common measures for evaluating profitability in banking: net interest margins (NIM), return on equity (ROE) and return on assets (ROA). 

“We note that these measures are at a ‘whole of bank’ level and therefore include activities that do not relate to personal banking services. We will consider the extent to which we can gather more granular measures of profitability that relate to personal banking services in particular.”

Small says the Commission now wants to hear from consumers, the banking sector and other interested parties.

“There’s been significant interest in this market study, and our thinking and conclusions will be guided by the feedback and evidence we receive over the coming weeks."