Reserve Bank says global financial crisis may have increased big four banks' market dominance, will monitor

By Gareth Vaughan

The Reserve Bank says the global financial crisis may have entrenched the dominant position of the country's big four Australian owned banks and it will monitor lending markets for any signs this is affecting the availability or pricing of loans.

The central bank makes these comments in its bi-annual Financial Stability Report. Pointing to a New Zealand Institute of Economic Research report done for the central bank before the financial crisis, the Reserve Bank says despite high levels of concentration then, "sufficient" competition existed and the financial sector was contestable given reasonably low barriers to entry and exit.

"However, the financial crisis may have changed the competitive dynamics across the New Zealand financial system as a whole given that finance companies and international banks are much less involved in new lending," the Reserve Bank says.

"It is also interesting to note that our capital markets remain small and are a limited alternative source of financing for SMEs in particular, factors potentially reinforcing the predominant position of the four major banks."

The Reserve Bank says it will continue monitoring lending markets for any signs the dominant position held by the big four - ANZ, ASB, BNZ and Westpac - affects the availability of pricing or lending.

"We also intend to analyse formal and informal barriers to entry and exit in the current environment. This will include some of the reasons why customers might be reluctant to switch between existing financial service providers, something which may deter potential new entrants."

Reserve Bank to look at whether big four's branches & other infrastructure creates barriers to entry

Asked if the central bank could elaborate on these comments, a Reserve Bank spokeswoman told interest.co.nz that  the central bank's analysis will look at things like whether the presence of existing banks’ infrastructure in the form of existing access to payment  systems, branch networks, access to international funding markets etc, creates practical barriers to new entrants. 

"It is not envisaged that a formal work programme will be built around this,  but the Bank may comment more about these sorts of issues in the future as a result of the analysis carried out," she said.

The big four banks, combined, held nearly NZ$313 billion, or 92%, worth of the NZ$340.65 billion of banking assets held by the main eight trading banks as of December 31 last year. The three New Zealand owned banks - Kiwibank, SBS Bank and TSB Bank - combined, held just NZ$20.5 billion worth of assets and Rabobank of the Netherlands NZ$7.2 billion.

This is against a backdrop where a total of 63 finance companies and other entities have collapsed since 2006 (see our Deep Freeze List for full details) and the introduction of non-bank deposit taker (NBDTs) regulations by the Reserve Bank, which now polices finance companies, building societies and credit unions, which has effectively increased the costs associated with running these businesses and lifted the barriers to entering the market.

NBDTs must now have credit ratings from an approved rating agency, governance arrangements designed to ensure they give proper consideration to the interests of all stakeholders, risk management programmes outlining how they will identify and manage key risks such as credit and liquidity risk, minimum capital requirements included in trust deeds, and restrictions on a deposit taker’s related party exposure and liquidity provisions enabling them to withstand a "plausible range" of shocks. (See a story on the NBDT regulations here and another here.)

Will look at lending margins

Meanwhile, the Reserve Bank says as it monitors competition in the financial services market, it will look directly at  specific product lending margins.

"For example, we have already considered home loan margins, which do not seem out of line internationally. This likely reflects the fact that banks do compete quite vigorously in that market."

KPMG's annual Financial Institutions Performance Survey released last week noted banks' profitability rebounded during 2010 with return on equity across the sector rising to 13.3% from just 1.5% in 2009 when the banks coughed up billions to settle their structured finance transaction tax avoidance disputes with the Inland Revenue Department. That 13.3% still lags the 17% to 22% return on equity the banks achieved from 2005 to 2008.

The Reserve Bank notes New Zealand banks recorded the highest return on equity among any banks from 22 Organisation for Economic Co-operation and Development countries between 2002 and 2007.

"This can be explained, in an accounting sense, by relatively low operating costs and a limited need to make provisions for bad loans over the period surveyed, coupled with reasonably healthy margins. However, there are difficulties in comparing accounting metrics like this across countries," the Reserve Bank says.

"It is also interesting to note that, as in Australia, return on equity for the bank sector is not that high relative to that achieved by some locally listed companies."

In their recently completed financial half year the big four banks reported a combined NZ$1.26 billion profit, up NZ$312 million, or 33%, from NZ$952 million in the same period of the previous year despite flat lending growth.

Meanwhile, in an attempt to make it easier for customers to switch between banks, Kiwibank's CEO Paul Brock would like to see the banking industry emulate its telecommunications counterpart and introduce bank account number portability so when customers switch banks they can take their bank account number with them.

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