New Reserve Bank Governor Graeme Wheeler misled Parliament on bank profits, Green Party claims

By Alex Tarrant

Reserve Bank Governor Graeme Wheeler has responded to a claim by the Green Party that he misled Parliament's Finance and Expenditure Select Committee on bank profits.

Green Party co-leader Russel Norman took exception to a comment Wheeler made to the Committee in early November that compared to bank returns on assets (ROA) across "most OECD economies," New Zealand banks' ROAs were "about average or below."

Norman released Reserve Bank charts which he said showed New Zealand banks were the fifth most profitable banks in the OECD, with only Iceland, the Czech Republic, Singapore, and Australian banks above them.

“The Governor was wrong to tell Parliament that our foreign-owned banks are only making average, or below average profits,” said Green Party Co-leader Dr Russel Norman.

Norman made no mention of State-owned Kiwibank, which also made a record annual profit in the year to June 30, 2012. (See Kiwibank annual profit surges 276% to record high of NZ$79.1 mln on higher net interest income and falls in expenses and impairment allowances).

Wheeler responded later on Tuesday, saying data for the period 2009-2011 showed returns on equity and assets of New Zealand banks appeared to be in line with other advanced economies.

Finance Minister Bill English dismissed Norman's claim as politicking. However, analysis by interest.co.nz shows in their most recent financial year the New Zealand subsidiaries of the big four Australian banks - ANZ, ASB, BNZ and Westpac - delivered an average return on equity 320 basis points higher than that of their parents at almost 19%.

And earlier this year the Bank for International Settlements anointed Australia's big four banks as the developed world's most profitable as measured by pre-tax profit as a percentage of total assets. Analysis by interest.co.nz showed the New Zealand subsidiaries were even more profitable than their Aussie parents with the average pre-tax profit as a percentage of total assets across New Zealand's big four 20 basis points higher than their parents at 1.39%.

Read Wheeler's statement below:

Reserve Bank Governor Graeme Wheeler today commented on bank profitability data that was released recently to the Green Party.

The Bank also released the data for the period 2009-2011, which shows returns on equity and assets of New Zealand banks appear to be in line with other advanced economies (excluding euro area countries).

Mr Wheeler said the Bank commissioned the data before the Finance and Expenditure Committee hearing into the Bank’s Financial Stability Report on 7 November.  However, the analysis was not complete at the time of the hearing, at which he was asked about bank profits.

“My response to the Select Committee represented my understanding of the information available at that time.  Our analysis was completed after the hearing and we released it to the Green Party in response to their request, which followed the hearing.  We are now releasing it publicly.”

Mr Wheeler said different measurement practices around the world, including or excluding tax and extraordinary items, meant that international comparisons of bank profit figures are not straightforward.

“Profits in the New Zealand banking system reflect relatively low levels of non-performing loans, and low cost-to-income ratios, compared with many other countries,” Mr Wheeler said.

Mr Wheeler denied the Green Party’s statement that the Reserve Bank is biased in favour of Australian banks.

“The Reserve Bank takes seriously its mandate from Parliament to supervise the New Zealand banking system, and it does so without favour.  Australasian-owned banks emerged in better shape from the global financial crisis because of their more conservative management, and our economies benefit from that strength.

“New Zealand’s strong banking system helped see the country through the global financial crisis.

“As I said at the Select Committee hearing, bank profitability has recovered to where it was prior to the global financial crisis, based on returns on assets.  If you look at the return on equity, they haven’t got back to where they were prior to the global financial crisis, and that’s partly because these banks are building up capital as part of the tougher Basel III regulatory requirements.”

The data

Banking System Comparisons of ROE and ROA

The charts below provide comparisons of average Return on Assets (ROA) and average Return on Equity (ROE) for advanced economies including New Zealand for the period 2009-2011. Banking systems in the euro area have been excluded from the comparison as bank performance in the region has been severely affected by the recent financial crises and resulting downturn in economic activity.  The charts show that ROAs and ROEs for the New Zealand banking system are within the range of those of other advanced economies.

Source

The source for the comparisons in the charts below are the IMF’s Global Financial Stability Report which draws on the IMF’s Financial Stability Indicator (FSI) dataset.  Averages for the period 2009-2011 have been calculated by the Reserve Bank.  Estimates of returns for New Zealand banks (on a pre-tax and extraordinary item basis) have been sourced from aggregate General Disclosure Statement data compiled by the Reserve Bank.

Please note that ROAs and ROEs for some countries are reported prior to tax and extraordinary items while others are reported on a net basis. To assist with comparisons, estimates of ROA and ROE for New Zealand have been shown on both bases.  Countries reported on an after tax and extraordinary items basis are asterisked.

* Indicates ratio calculated after extraordinary items and taxes.

Misled

Earlier on Tuesday, the Green Party issued a statement claiming new Reserve Bank Governor Graeme Wheeler has misled Parliament's Finance and Expenditure Select Committee on bank profits.

See the release from the Greens below:

Reserve Bank Governor Graeme Wheeler misled Parliament at his first appearance at the Finance and Expenditure Select Committee when he told the members that bank profits were “about average or below” most other OECD economies, the Green Party said today.

Data now obtained from the Reserve Bank by the Green Party under the Official Information Act shows that New Zealand banks’ pre-tax returns on assets from 2009-2011 make them the fifth most profitable banks in the OECD, with only Iceland, the Czech Republic, Singapore, and Australian banks more profitable.

“The Governor was wrong to tell Parliament that our foreign-owned banks are only making average, or below average profits,” said Green Party Co-leader Dr Russel Norman.

“The Reserve Bank’s own bank profitability data ranks our big four Australian banks as the fifth most profitable in the OECD.

“Our new Governor’s complacency about bank profitability is concerning. His job is to regulate our banks, not be their champion.”

Earlier in the year, the independent Bank for International Settlements found that Australasia's big four banks were the most profitable in the developed world for 2010 and 2011. In 2011, Australian banks made a pre-tax return of 1.19 percent on assets compared with a global average of 0.36 percent.

“The Governor’s mistake demonstrates one of the limitations of having one person solely responsible for the decisions of the Reserve Bank,” said Dr Norman.

“Boards make better decisions than individuals and are less prone to capture by the industry they regulate. This is why no other OECD country vests this much power in one person.

“The simple fix is to make the Reserve Bank Board accountable for significant Reserve Bank decisions – like setting the Official Cash Rate – and ensure the Board includes representatives from the wider economy, like the export and manufacturing sectors.

“The excessive profitability of our Australian-owned banking sector is to the detriment of other sectors in the economy, like manufacturing and agriculture, and affects anyone on a personal level that has a mortgage, credit card, or has savings in a bank.

“If we care about creating jobs and maintaining our incomes, we can’t afford to have a complacent bank regulator that looks at excessive bank profits and then looks away.”

Reserve Bank profitability data released under the OIA: http://www.greens.org.nz/sites/default/files/reserve_bank_banking_system_comparisons.pdf

Here is a transcript of Wheeler's comments on bank profits made to the Committee:

“If you look at return on assets in New Zealand, it’s recovered to where it was prior to the global financial crisis.

“If you compare it to the return on assets across most OECD economies, we’re in fact about average or below.

“If you look at the return on equity, we haven’t got back to where we were prior to the global financial crisis, and that’s partly because these banks are building up capital as part of the Basel III requirements, and the Reserve Bank’s requirements.

“So ROA – return on assets – probably at the OECD average, or slightly below. ROE, not back back to where it was back in 2007.

“In essence we want a strong, competitive banking system. We want it to be competitive and efficient and basically to be a contestable market – not to have barriers to entry – and to force these institutions to compete amongst one another.

“And we see a lot of competition there.”

Playing politics

Finance Minister Bill English told media in Parliament on Tuesday morning the claim by the Green Party was mere politicking.

“Any information I’ve seen is pretty consistent with what the Governor said," English said.

“I think this is about Russel Norman competing with the Labour Party to be Opposition Finance Spokesman, but actually the only one in there with experience is Winston Peters," he said.

“I don’t think it’s serious at all. I think this is just Opposition politics.”

“They’ll get the chance to put that to the Reserve Bank Governor when he comes to the Select Committee [on Thursday].”