By Gareth Vaughan
The big banks' net interest margins have normalised back to a sustainable level and there needs to be more acknowledgement that the New Zealand banking system is among the most competitive and efficient ones in the world, says Bank of New Zealand (BNZ) chief executive Andrew Thorburn.
Speaking in a Double Shot interview with interest.co.nz after invitations were extended to the CEOs of the big four banks to do 'year ahead' video interviews, Thorburn said the banks' net interest margins, going back over a long period of time, have been consistently in decline.
"Post the global financial crisis (GFC) they fell quite a lot and now they’ve normalised back to what’s probably a more sustainable level, that would be my view," Thorburn said.
In their last financial year all four of the country's biggest banks recorded solid margin increases as the posted combined net profit after tax of NZ$2.7 billion, featuring record profits from both ANZ New Zealand and ASB. ANZ's margins rose 11 basis points to 2.38%, Westpac's rose 22 basis points to 2.33%, BNZ's rose 14 basis points to 2.30%, and ASB's jumped 40 basis points to 2.08%.
The Reserve Bank monitors bank net interest margins on a monthly basis. The most recent figures, for November, show the combined margin for the retail banks fell to 2.34% in November from 2.37% in October. They were 1.87% in September 2009 when the central bank series began, but near 3.5% in the early 1990s and over 2.50% in 2003. See more here on page 58 of this Reserve Bank report.
Lots of commitments
Thorburn said out of those margins, the banks have to do a lot of things.
"We (BNZ) are running 182 stores around the country, 30 partner sites, employing 5,000 people, investing in technology and risk management so that we’ve got a bank that’s sustainable for customers and for shareholders and for the staff and for the government via taxes and no bail outs," said Thorburn.
"We’re running a sustainable (for the) short, medium and long-term bank and to do that you do have to be profitable and those margins enable us to invest. In the last couple of years, for example, at BNZ we’ve invested NZ$200 million in stores, in partners networks, in new technology because we think that’s very important."
It was good the New Zealand banks are profitable, Thorburn added, given the failure of unprofitable banks in the likes of the United States and Europe in recent years with notable failures including Lehman Brothers, Royal Bank of Scotland and Dexia.
"Thank goodness we are profitable because you look what has happened around the world when banks haven’t been profitable. My view is ( the NZ banking industry) is well regulated, well governed, very competitive. Before any distribution to shareholders the banks have got to pay interest out to depositors. We pay NZ$300 million to NZ$400 million to staff, the same amount in taxes (NZ$291 million in income tax in the last financial year), the same to suppliers and you’re managing a lot of risk that you have to price for."
"So I think there needs to be a bit more acknowledgment that the banking system here is a very good banking system, by all objective measures one of the most competitive and efficient banking systems in the world and that overall it’s functioning very well," said Thorburn who also has a National Australia Bank (NAB) group oversight role for Great Western Bank in the United States and NAB's Asian operations.
Thorburn said competitiveness was about ensuring there were good products and services at good prices for customers and that shareholders get an appropriate return "for the risk of investing in a bank."
NZ$330 mln annual dividends
BNZ paid NAB annual dividends of NZ$330 million in the year to September 30, 2011, down from NZ$563 million the previous year. Its annual net profit after tax rose 11% to NZ$671 million. ANZ New Zealand, the country's biggest bank, paid its Australian parent dividends totaling NZ$421 million in the same year, a period in which it produced record annual net profit after tax of NZ$1.085 billion. ANZ's dividend payments were down from NZ$492 million in the year to September 2010 and NZ$1 billion in 2009.
ASB, which recorded record annual net profit after tax of NZ$568 million in the year to June last year, paid parent Commonwealth Bank of Australia dividends totaling NZ$280 million, up from NZ$160 million a year earlier. Westpac NZ didn't pay its parent, Westpac Banking Corporation, a dividend. Westpac NZ raised NZ$1.130 billion through the issue of shares to its parent last October to help fund the transfer of more than NZ$6 billion worth of assets and over NZ$5 billion of liabilities from its parent to bring the bank in line with Reserve Bank rules.
In a speech last August Reserve Bank Governor Alan Bollard warned the Australian owners of New Zealand's major banks not to expect profits in the future at the same levels they've enjoyed over the past decade due to post GFC regulatory changes and ongoing deleveraging by customers. Bollard pointed out that the four Australian owned banks dominate the New Zealand financial system to an extent seen in few other economies, accounting for nearly 90% of the banking sector, or just over 70% of the financial system as a whole.
And in one of its bi-annual Financial Stability Reports last year the central bank said the GFC may have entrenched the dominant position of the country's big four banks and it will monitor lending markets for any signs this is affecting the availability or pricing of loans.
€500 million covered bond issue 'quite expensive'
Meanwhile, Thorburn said this week's €500 million, three-year covered bond issue to European institutional investors by BNZ was "quite expensive." He said BNZ is paying about 250 basis points above the bank bill rate for the money, with this price including the cost of converting the money back to New Zealand dollars.
"After the peak of the GFC we were paying about 170 (basis points) over (the bank bill rate) so it’s certainly more expensive and we would much prefer to get five and seven year money," said Thorburn. "Now it’s three year money. I think that gives you an indication that whilst the market’s working, it’s a little more nervous, it wants a higher price and it wants a lower tenor."
Looking at term deposit rates between 4.5% and 5%, Thorburn said the cost of funds for BNZ overall is "maybe 5ish(%). It’s not 2.5% (the Official Cash Rate)." See all bank term deposit rates for 1 to 9 months here and see all bank term deposit rates for 1 to 5 years here.
Despite the challenges, notably internationally from the Eurozone sovereign debt crisis, Thorburn said he was looking forward to the year ahead.
"I think it’s going to be a tough and challenging year, but despite that and what we’re going to have to work through, I still feel good in the sense that we’re in a great country."
"I work in a good company, it does good things for customers and the economy," Thorburn added. "We’re in a good sector and, travelling around the world looking at banking systems and economies, I’m always pleased to come home because I think this is a really good place to be."
"Not withstanding some unpredictability and volatility that will no doubt happen, I’m still looking forward to the year ahead."
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