PwC floats possibility of heightened regulatory focus on banks as interest income climbs and barriers to enter market rise

By Gareth Vaughan

Rising interest income and new international regulations that appear set to reinforce the market dominance of our major banks could lead to New Zealand politicians following in Australian footsteps and moving to shake-up the banking sector, PricewaterhouseCoopers (PwC) says.

The accounting firm's latest bi-annual Banking Perspectives report titled Banks return to normal, but not as we know it covers the financial results of ANZ, ASB, BNZ, Kiwibank and Westpac for the second-half of their 2010 financial years.

The report, out today, notes that the five banks' net interest income rose by NZ$300 million, or 9%, from the first half-year to NZ$3.3 billion. PwC says this is "impressive" considering the limited growth in the banks' lending books with loans to customers up by just 0.7%, or NZ$2 billion. This interest income rise represents an average 8 basis points increase in the major banks' reported net interest margin from the first-half of 2010.

And PwC points out the net interest margin increase for our major banks is higher than that experienced by the Australian banks, including ANZ, ASB, BNZ and Westpac's parents, who reported a 5 basis points lift from the first-half of 2010. That said, PwC says the New Zealand banks' absolute net interest margin is still below that of their Australian counterparts.

Net interest margins rose as interest income climbed 4%, double the 2% increase in interest expense, meaning the banks have increased the interest they've earned on loans above the increase seen on their funding interest costs.

PwC partner Sam Shuttleworth told interest.co.nz in a video interview that, prior to the half-year covered in PwC's latest report, net interest margins had been decreasing for 18 months. And PwC suggests the strong rise is unlikely to continue as the repricing of lending ends and the upward pressure on the cost of wholesale funding continues to flow through, eating into bank results.

"The question is how aggressive will the major banks be to protect their interest margins with the fear of starting bank regulation discussions, like those seen in Australia?"

A round of bank criticism, primarily over mortgage rates, by Australian politicians, media and consumers, culminated in Treasurer Wayne Swan announcing a major reform package in December that was aimed at reducing pressure on mortgage rates. In New Zealand an instant response came from bank workers' union Finsec, which said the Government here should follow suit.

The big four banks - ANZ (including the National Bank), ASB, BNZ, and Westpac - held NZ$306 billion, or 92%, of New Zealand's total NZ$332.8 billion worth of banking assets as at September 30 last year.

Meanwhile, PwC also points out new global banking regulation due to be introduced between 2013 and 2019, known as Basel III, will require local banks to undertake additional process and systems changes. In anticipation of these, the major banks have been building up their capital reserves. See page 16 and 17 of PwC's report for details of the Basel III requirements.

PwC says this additional regulation of banks will increase the barriers to enter the market for potential competitors, therefore protecting the major banks' market power.

"This provides an additional angle to the political discussions occurring in Australia and increases the likelihood of them repeating in this country."

Shuttleworth says, however, that PwC expects pressure to return to net interest margins due to high offshore funding costs.

"They (funding costs) are likely to get higher when you take into consideration the global demand for wholesale funding," Shuttleworth says. "With Basel III coming along, all the banks are going to be competing in this area."