'Thank goodness we're profitable', BNZ CEO says of NZ banks operating in one of the most 'efficient and competitive' global banking systems

'Thank goodness we're profitable', BNZ CEO says of NZ banks operating in one of the most 'efficient and competitive' global banking systems

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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37 Comments

"I work in a good company, it does good things for customers and the economy,"....
"It sells credit and works hard to ensure the property bubbles both rural and urban are safe because they are the means by which my bank extracts billions from the economy every year and on those billions my fat bonus is calculated."

Wolly.
Let's not be too contemptuous. BNZ and other banks aren't breaking any laws or forcing anyone to borrow. There are laws, monetary policy settings and consumer behaviour that banks work within.
BNZ and the other banks are working within those rules. Let's play the ball not the man.Plenty of room to criticise the Basel Committee, the RBNZ, the laws etc.
At least Andrew Thorburn is prepared to front up and explain what he does and why. I've got a lot of time for him because of that. We've never had BNZ refuse to answer a question. They're proud of their business and people. Fair enough.
We appreciate him coming along and we've got invitations in to the other bank CEOs.
Let's hear their side of the story.
cheers
Bernard
 

Bernard,
1) how profitable would banks be without govt guarantees?
2) how profitable would they be without a housing and credit bubble SUPPORTED by govt tax policy
3) how much of their profits comes at the expense of hard working households requiring more and more of their income to service mortgages
4) how profitable would they be without massive immigration
5) how profitable would they be without central bank support via crazy low rates

When you consider all the above, its clear banks are not efficient businesses deserving what they get, they are sponges living off govt/taxpayer largesse. Its also not clear that we are lucky to have strong banks when their strength comes via household pain. America may have its problems, but an employed household over there has a far better quality of life.

not to mention covered bonds, which the govt has recently allowed to enable banks to source cheaper funding at the direct expense of saver risk.
Banks and the finance industry were ONCE the handmaiden of the economy Bernard. They are now the economy and one can only wonder to what degree they infiltrate govt policy (we have an ex banker as a PM for Pete's sake) probably more by pulling wool over govt eyes than direct corruption. Its good you have a CEO in to interview, but lets be clear, strong profitable banks are NOT GOOD FOR THE ECONOMY when their gain equals our pain. You only have to look at how much mroe of their book is tied up in housing loans now compares to the 70s (in Aus 25% housing in 70s, 60% plus now) to show their scant interest in investing in profitable business.
If i was you, I woudl grill him a bit harder. Here are some suggested questions:
As a captain of a free market enterprise, are you embarrased to be a recipient of a govt guarantee? What concrete steps are you taking to raise capital ratios so you dont "need" it anymore? Will you be sending a Christmas card to taxpayers to thank them for their largesse? Do you think its a bad thing that housing is at record unaffordable levels, and if so, do you think it would be a good thing for housing to drop 30% to address this issue?

(1) there's no govt guarantee any more.
(2) tax policy has little to do with housing bubble, as evidenced in countries with CGT.
(3) most if not all bank profits come from their customers - just like in most other businesses.
(4) "massive" immigration? where are you seeing that? generally, immigration means more demand for banking services - this is not necessarily bad in itself though.
(5) banks were profitable all right when the OCR was higher, so does not matter really.
As to the employed household in US having a better quality of life – well, most of them work much harder than in NZ; there’s also the scale and diversity of the economy; you can’t really compare these…

Alex. The guarantee was explicit up till a month ago, and implicit now. And the BNZ's parent NAB still enjoys the explicit guarantee.
As for tax not helping the housing bubble, you are in dreamland. Its not the only factor in a bubble, but certainly helps to sustain it and make it worse eg the bubble in NZ / Aus (both have neg gearing and nil or reduced CGT) is a lot worse than the US/UK ever was, and our bubble continues in part because speculators are rewarded and savers are punished making property a more attractive investment than would otherwise be the case.
The profits come from their customers who are playing a suckers game in which the chips are stacked against them ie banks can lend a tonne of money to brainwashed customers to push up the cost of land without having to worry that the loans wil not come good as they know the govt will bail them out in the end.
Immigration was massive for most of last decade and was a major contributor to out housing shortage, although it has come off the boil recently thank goodness. Pushing the OCR lower allows banks to peddle more debt, ultimately its the quantitiy of debt NOT the margins where they are creaming it.

You've read too much nonsense on this and other sites and are regurgitating it now. A minor correction: NZ banks have not used the govt guarantee for quite a while now (not until a month ago as you claim). More importantly, though,-
Only the deluded, brainwashed or incapable can vote for more taxes; anyone with enough brains to earn a living rather than relying on the State's handouts wishes there would be less, not more, taxes.
The nature / mechanism of RE price "bubble" (and subsequent fall) in the US were completely different to NZ or Oz. The relatively high price levels here in NZ are mainly due to the fundamental, basic but often overlooked supply/demand situation.
The whole anti-banks nonsense has become trendy nowadays; it is justified in certain cases (linked to the GFC and its facilitators), but it is nonsensical to apply it indiscriminately with a broad brush…

Alex13,
we all read and regurgitate, some are just a bit more careful about what is worth digesting and what needs spitting out. Its irrellevant whether the banks USED the guarantee, the point is it was there, and this added TAXPAYER SPONSORED INSURANCE that enabled them to carry on business in a way that they would not otherwise be able to do (the implicit guarantee still enables them to lend at lower rates and in larger quantities). Moodys said banks in Aus would be 2 notches lower without the guarantee. The deluded are not after MORE taxes, just better distribution ie if we remove neg gearing and make CGT comprehensive, we can reduce marginal tax rates for all and remove tax incentivised investments. As for supply / demand, not denying we cant do more here to increase buildings, but lets not add "demand" fuel to the "shortage" by making alternative investments (eg bank deposit) less attractive and subsidising loss making activities. As for bank bashing, I am happy to apply it where its due - our MASSIVE private debt ratios have produced a housing bubble, not a productive economy. Someone is making money out of this, guess who??

Hey, really good to hear Andrew Thorburn & Co at BNZ will always answer a question. Next time you are snuggling up with him, ask him what his advertising budget is for informing his dispositors about the newly issued Covered Bonds and how they affect the status of thier deposits. Let''s hear his side of the story on that.

This article is like waving a red flag to a bull.

Interesting how Mr Thorburn states how important it is to have a profitable banking system when all those profits go to Australia. 
Billions as Wolly has already stated. 

Mike M
You say 'all' of the profits were sent to Australia in dividends. That's not true. Last year about half of the profits from the big four banks were sent back in dividends to Australia.
Here's the detail on profits and dividends in Gareth's story.
"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."
 
cheers

When an organisation can conjure up money from thin air and charge interest on the total amount, why wouldn't it be profitable.  If the vast majority of NZ'ers undersood how banks operate they would be appalled.

It's not out of thin air.  It's out of the cycle where loans get spent and become deposits.
I suspect that fractional reserve banking is guaranteed to self-explode, but I can't imagine a sensible alternative.  (I've looked at the positive-money people in the UK, and I'm not convinced.)  If anyone can, do they want to put some details or a link here?

NZ Heads to Fin
Before you start criticising people and banks, I'd suggest you try using the facts (and some correct spelling) and dropping the ugly language.
The best measure of net interest margins and the ultimate referee in this debate about funding costs is the Reserve Bank figures on retail net interest margins, which Gareth refers to above.
cheers
Bernard

Australia has an OCR of 4.25 yet you can get a floating mortgage rate of 6.8% or less ... less margin inside Aus?

That's a similar margin (around 2.6-2.8%) to here. Floating rates here are advertised around 5.75% but most brokers can get around 5.4% (which is 2.9% above OCR) from banks when they are pushed and are fighting for business.
They are certainly doing that at the moment.
cheers
Bernard
 

Competitive Environment  ?  Rubbish.
Collaborating is a sophisticated thing nowdays.  They know how to work together to maximise returns.  And they don't have to talk to each other about it.  Nor do anything that is illegal to fix prices.  It's like a dance where they co-operate but don't need to talk to each other.  But costs to the users are kept very high.
Big Four petrol companies are just the same.
The only solution to deal with this, because the anti - monopoly legislation does not go anywhere near the mark, is to break these looting enterprises down into multiple smaller companies.
 

KH
I disagree on this. Got a mortgage? Suggest to your bank you might shift and they will cut your rate.
Brokers regularly squeeze the banks hard and they react.
It's true though they don't encourage people to move their main accounts.
Plenty of competition though on mortgages and occasionally term deposits.
cheers
Bernard

"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."
 
Ah..yes...  thats' what Andrew Thorburn  means by a very competitive environment where profits are squeezed...    : )
Bernard... u seem to be defending this guys comments... just because he graced u with an interview...????
Wolly ..et al... are not attacking him personally..... but I do think all of the above comments are reasonable ...even thou they might not be accurate..
AND... I certainly don't view the Reserve Bank as any kind of ultimate referee..
Why don't u keep in mind that most bank depositors are actually  NET LOSERS.. ( or close to it )  in real Terms.  Also keep in mind that many depositors have few choices and could well be your Mum or Dad.
if Banks were in that predicament... where the Reserve Bank squeezed their margins, in a contrived way...  they would squeal like  stuck pigs.
Cheers  Roelof
 

Roelof
Many thanks.
I give Andrew Thorburn credit for fronting regularly.
I'm a regular questioner of bank margins. It's good to have a debate.
cheers
Bernard

"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."
A previous report on interest.co.nz said the bond was issued at 113bp over swap. According to the RBNZ's November Financial Stability report the basis spread (the cost of converting Euro payments back into NZD) is about 70 bp. That makes the total cost in NZD around 185bp, a long way from the 250bp quoted by Thorburn. Has the basis spread doubled in the last couple of months ? Or is Thorburn exagerating his cost of funds ?

Whilst your all winging about NZ bank profits going overseas do you know you are allowed to own Australian shares. I have some NAB shares so some of the profits come back to NZ.

You may well be caught by the FIF rules, in which case they may make your tax return into a bit of a nightmare.

I'm grateful for my bank. Thanks to my bank I can live in a nice house (which keeps my wife happy) in a pleasant suburb - because it's a bit difficult (without an inheritance or dotcom business) to find half a million dollars sloshing around in the cheque account (to buy your house).

Also, I can easily pay my bills online, move $$$ to investment accounts, and check balances/transactions daily (thanks to my banks services).

It's a bit unrealistic to expect to have the advantages & leverage as a sole citizen that large organisations enjoy - e.g. interest on a retail deposit, borrowing power overseas.

BH is trying to run a business here, with reasonable comments from people interested in improving their financial knowledge and share ideas - this site is not intended as a HoneyPot operation for anarchists, anti-corporates, and self-sufficient-ers. Sole self-sufficient philosophy tends towards selfish defeatist thinking. Reasonable forms of capitalism has eradicated more poverty, trade & wise use of borrowing/finance has started more enterprise than all other forms of collectivism & survivalism.

Maybe think of NZ with no mechanisms for financing businesses, farms, homes, cars, travel, study?

BH gets what he is given. If he doesn't like the comments, he can go back to working for Reuters for salary.

Okay, well if you open up a surfboard shop, you might be puzzled if Morris Dancers (looking for tambarines) kept coming in, kicking the boards and criticising the designers?  ie if you're not interested (pun intended) then consider clicking on the Whole Earth Catalogue Website.....

Life is tough Mr Belt, the internet is not a surfboard shop on main street.

Tell him to brace himself.

Snippy,
 
Lets get this one right. The 4% is not profit, its income, out of which the banks has to pay rent , salaries, power, put some aside for loans gone bad, and pay tax, just like any other business tht buys their raw materail for x and sell it for y out of the difference they have to pay salaries, rent power and put some aside for the people who don't pay and pay taxes...the difference after all this is profit....
 
And to all the other people who bemoan paying the rates to australian banks their are choices such as the nz banks, Kiwibank, SBS the co-operative bank, its just shear interia which stops us from doing this. I moved from westpac to kiwibank and enjoy a better deal and I know the profit they make out of me stays here in NZ. 

Was that a copy & paste?
Is it really realistic to unravel the entire global banking system?  Why not just get on with life, making the most of opportunities, while maintaining your own personal ethics? 
Perhaps one day there will be perfect justice  -  however it probably won't be humanly instigated ....

Mortgage Belt - I suggest you read the Bonner/Wiggin book 'Empire of Debt'.
 
That money those banks of your 'lend' out, mostly doesn't exist. It expected, though,  to buy real stuff that does exist - presumably what keeps your wife happy. You may continue to pretend that this system is capable of growth forever, but at this stage of the game, I'd call anone who still believes that, a nutter.
 
Bernard - for all I'm sure he's a nice fellow, honest and well-meaning - also expects to buy real things whith the money he 'makes', running this site. Clearly, there has to be something real to be on the shelves for him too. If there isn't, then your wife and he are in a bidding-war - and the more $ they think they have, the bigger the number of the winning bid. Put that on top of a reduction in supply of real stuff, and your hithertofore comfy wee system is in permanent trouble.
 
No good calling people names - won't change reality. Better doing some homework. That book is a good start.

Okay, I just read it.  I admit it - I've been wrong all my life.
  I'm sorry, .... I'm going to sell my house, cars, investments etc and repay the corrupt bank with my non-existent money.  Then maybe move on up to Aotea Square with my tent and join the 99%  -   actually I can see   -   I see Blanket Man was right all this time,  ... In Lou Reed's words "I decided to drop out"  
 
 

Tell us how it goes.
(Depending on how sarcastic each of us is being.)

Hmm ... well according to my loan contract, I have 12 years left to repay fully, at under 20% of net income.  The Maths seems ok to me. 
But happy to accept your systems thinking analysis. While being aware of these things you may still utilise the mechanisms e.g.  you may know the dangers of credit cards but still be able use one. 

I'm currently confused about the BNZ.
When I supervise them inadequately, I feel that they are feathering their own nest, but I've just told them about one of those decisions, and they've undone it much more thoroughly than I would have expected.
I guess that, next time I'm unable to supervise them, things will go back to normal.

Think NZ-ers have been conditioned to expect mortgage rates 3% higher than most developed countries. We somehow think that 5.75% is really cheap - well it is cheap by historical comparisons - but in comparison to wholesale rates globally they are still very high....