By Sarah Mehrtens
I was concerned to see recent commentary that bank profits are up due to an increase in the banks’ net interest margin (NIM). (See Bernard Hickey's commentary on why Bank Profits are too high and how regulators should force margins lower.)
It is just too simplistic to view margins in isolation, and to fail to take into account the changes in the cost of funding, global economic conditions, the quality of bank assets, and bank operating efficiency.
A strong, robust and secure banking system underpins New Zealand’s economic development. We weathered the financial crisis well compared to other countries.
Profits are an important part of our banks’ strength, as is the basis of those profits.
NIM is a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. It is similar to the gross margin of non-financial companies.
The NIM for the New Zealand banking sector has been trending slightly upwards over the past year by approximately eight basis points (2.16% average for the half year ended June 2011 and 2.08% average for the half year ended June 2010). This slight net increase in the margin has resulted from a combination of factors. It is at least in part due to our banks’ relatively strong asset quality.
Essentially, New Zealand banks have been able to offset significant increases in their funding costs (stemming from the higher cost for retail deposits and wholesale term funding in recent years) through repricing (both for risk and the higher funding costs) and changes in portfolio composition, for example by customers choosing to switch from lower margin fixed rate mortgage products to higher margin variable rate mortgage products.
It is misleading to compare average bank mortgage rates to the wholesale 90 day rate (floating comparison) or two year swap rate (fixed comparison) and then conclude that bank margins on mortgages have significantly increased over the past five years.
This analysis has not factored in that retail funding spreads (the cost of raising retail funds relative to the benchmark wholesale 90 day rate or the OCR) and long-term wholesale funding spreads (the cost of raising long-term offshore debt relative to the swap rate or the OCR) have increased sharply since the global financial crisis.
These spreads are now considerably higher than the benchmark rates for short term funds.
As a result, the banks’ marginal funding costs have increased considerably over this period. In fact, the funding wedge has increased from around 20 to 30 basis points above the OCR, prior to the financial crisis, to around 150 basis points in March 2011.
The higher spreads for long-term debt have reflected a reassessment of term risk by international investors and increased issuance of term debt by banks, corporates and governments, while the higher cost of domestic deposits has largely reflected independent efforts on the part of local banks to increase their share of retail funds, as demanded by the Reserve Bank of New Zealand, investors and rating agencies.
A consequence of the RBNZ imposing a Core Funding Ratio (CFR) requirement is that it has tended to raise the cost of funding for any given interest rate because banks must make greater use of retail deposits and long-term wholesale debt, which are typically more expensive forms of funding. For example, moving from a 65% CFR to a 75% CFR adds around 10 basis points to funding costs assuming the various funding spreads did not change.
In his recent speech at the New Zealand Shareholders’ Association Annual Meeting, RBNZ Governor Alan Bollard said RBNZ analysis suggests New Zealand banks have not earned interest margins that are particularly high relative to other countries, and supports the view that strong profitability was due to low operating costs rather than undue market power being exercised over customers.
New Zealand banks are among the world’s most cost-efficient. Something for New Zealand to be proud of.
Our banking system is robust and well regulated, which is good for New Zealand.
Let’s look at the whole picture when considering banks profits, including the cost of funding, the impacts of the financial crisis, quality of bank assets, and bank efficiency. Looking at interest margins outside this context does not help improve financial literacy in New Zealand.
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Sarah Mehrtens is the chief executive of the New Zealand Bankers’ Association
42 Comments
"A strong, robust and secure banking system underpins New Zealand’s economic development. We weathered the financial crisis well compared to other countries."
Profits are an important part of our banks’ strength, as is the basis of those profits.
NIM is a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. It is similar to the gross margin of non-financial companies.
The NIM for the New Zealand banking sector has been trending slightly upwards over the past year by approximately eight basis points (2.16% average for the half year ended June 2011 and 2.08% average for the half year ended June 2010). This slight net increase in the margin has resulted from a combination of factors. It is at least in part due to our banks’ relatively strong asset quality.
I've never read so much (expletive deleted)
It is solely due to the Reserve Banks that there is ANY ability to weather a financial crisis... ANY institution that borrows short term and lends long term is asking for trouble in a liquidity crisis.
The strength of the banking system lies in the hands of the Reserve Banks NOT the high profits of Banks.
Ok... lets compare gross margins of non-financial companies and Banks.
If I buy something for $2 and sell it for $4... It is totally meaningless to say my gross margin is $2.. ( Buying at $8 and selling for $10 ... is the same gross profit of $2 )
Companies talk about margins in terms of Ratios...%.
If I borrow money at 3% and relend it at 5%... they say it is a 2% margin...
I say it is about a 70% markup.
If I borrow at 6% and relend at 8%... they say it is a 2% margin
I say it is about a 35% markup..
ANY... businessman would say that a markup of 70% is FAR MORE profitable than a markup of 35%.
Domestic depositors have been screwed by the Reserve Bank into low returns on their deposits ... and the main beneficaries have been Bank profits..!!!!!!!!!!!
Why have they done this..???? Probably to help Banks strengthen their balance sheets and help make the overall system more robust and secure..!!!! .... yeah I'm a cynic.
There is so much spin in this article... I can smell the rubber on the road.!!!
Cheers Roelof
Just want to add....
The Banking system is brilliant and amazing as a "payments system".
It is a wonder of modern technology and commerce.
In that regard it contributes to, and plays a part in, NZs' growth and prosperity.
As a money lender with the ability "create credit"...... it sucks... it's a thirsty parasite.
cheers Roelof
Using your arguement way don't we see higher margins when interest rates are high??? We don't and I think you are being selective in your arguement as we are in a low interest rate enviroment. Are you saying that based on your 3% deposit rate and 5% lending rate (70% mark up to use your term) you would be comfortable for this 70% mark up when rates moved to say 7% deposit and 11.9% lending?
Banks work on margins just like the petrol retailer. Their margin is fairly constant whether petrol is at $1 litre or $2.
Money man.. My comments are a response to the article...
Sarah is arguing against the comment that .."bank profits are up due to an increase in the banks’ net interest margin."
What she says is not true... in my opinion.... or at least misleading.
In this environment .... where depositors are actually get -ve real returns.. Banks are doing really well, in regards to the margins they are getting.
I think it is disingenuous to talk about margins in the way she does.
It is far more profitable to have a 70% markup than a 35% markup.
That is all I am saying....
cheers Roelof
You go Iain, your lengthy rants are most appropriate in this context.
I will go a bit further. They are bloody shysters the lot of them.
I would urge everyone to get out of the banking system as best they can. Certainly no deposits, and eliminate any debts to them also. Put your assets somewhere that doesn't involvle them.
.. umm , before we collapse the banking industry , 'cos we're really pissed at those greedy pigs for having led the world to the brink of financial armageddon , let's recall two facts :
1 : That the banks weren't alone . A grab-bag of culprits also includes central bankers , ratings agencies , governments , and a greedy investing public .
and 2 : Few folks can buy a house , a farm , or create a business with 100 % personal funding . A line of credit , a mortgage if you will , is required . And until Phil Goff and David Cunliffe gain political power , interest-free loans are unlikey to be offered to the entire population via the government . You still gotta go to the bank , just as Iain Parker did .
I don't agree that you go to at all Gummy, however it does require a bit of forward planning.
I saw a crash coming and pulled out of housing, now I have pulled out of the bank. Most have the blinkers on though and think all is ok in our property ponzi scheme.
Just remember that the banks are leverage higher than 10:1, 16:1 if I recall and those stats are on this site somewhere. That means in a bank failure only 6% of depositors get their money back.
Not right. I think the 6% (closer to 8%) relates to the banks capital (shareholder funds) not the assets it has and you are assuming all these assets (loans as loans are assets to banks and deposits liabilites to banks) will not be recoverable.
The RBNZ requirres the banks can only lend to a certian level of its capital as one controlling factor and still needs funding (deposits raised from a number of sources and controlled by the Core Liquidity Ratio requirements). Banks can not simply continue to lend out endlessly.
I think with 75% of our money supply being debt against residential property, that it is a fair assumption that most will be non recoverable. M0 to M3 is even worse at a 67:1 ratio.
On top of that the planet doesn't have the resources to cover the debt currently being accrued.
True Gummy - a greedy investing public indeed.
But
If the banking/motrgage lending/usury wasn't there, what would the price of that farm, house or business be?
Beyond peak, there is no margin left. You're seeing it now. So the derivatives/subprime were really just the manifestation of investors desire for 'profit', the need for 'growth', vs real underwrite shortfalls.
The bankers offloaded where they could, to Govts - socialising the debt. The fat-cats then suggest the Govts balance their books by fire-selling public assets.
The joke is that the assets can onlysqueeze so much blood out of Joe stone Public.
They'll be relatively richer, but under a lowering lid.
As you see around the world, there is a trigger point where folk don't take that any more, England,Greece, Middle East - it's an interesting exercise to guess the flash-point for each culture, given style, history, stress.......
7 billion head on a planet capable of supporting 2 - or maybe only 1 - billion sustainably. What can you expect?
".. umm , before we collapse the banking industry", absolutely wrong it already collapsed and as the european crisis is showing it will do so again. We want reforms which will prevent future financial crisis, and take tax payers off the hook for the financial sectors losses. The reforms are in no way punitive, and there will still be banks afterwards, and they will still lend money.
You can't cause a bank collapse by a bank run. This is the reason we have a Reserve Bank. To stop banks collapsing from insufficient reserves. In the past where there was a gold standard, and notes were exchangeable for gold you could cause a bank to collapse, but those days are long gone sorry.
Consider yourself scolded BH. Sarah Mehrtens, a reasonably pleasant face of NZ Bankers' Association, clearly has the best interests of New Zealanders at heart. We should all love the banks. Perhaps organise a 'Hug a banker today' day.
The soon to be made redundant bank workers (not the really important ones at the top like the obviously delightful, patient and well-informed Sarah) really should consider donating their last salary cheques to the Banks' benevolent fund that helps impoverished bank CEOs with their house rentals.
Can someone remind me exactly what the Westpac CEO's pay package was... and how much he was having to pay for his house in Auckland...
Thanks Sarah for the insights.
We should all now weep grateful tears at the generous and charitable services provided by the banks as they selflessly protect our best interests by redeeming ever more billions of dollars of profits over the Tasman.
I now realise just how vital this is to the continued economic wellbeing of all NZ
Cheers to all.
Scarfie
If you don't mind me asking, what assets have you put your cash into.
I sold up all property 3-4 years ago and have been getting out of equities this year. I now in the uncomfortable position of having all of my assets in cash in banks and am becoming increasingly uncomfortable with the exposure to a banking crisis.
Are you in physical precious metals?
cheers
Ptolemy I publiscised my move to take a position in some metals last month, no secret there. But be clear my position is modest, as I am a man of modest means:) My primary asset will always be my resourcefulness. For instance today I stripped down my bench saw and replaced a bearing in the motor. Technically illegal without the electrical certificate to do so, but what the hell.
Am I confident in my metals position, hell no, so don't go to me looking for advice. The internet may not be the best place to be looking for advice in the first place, but at least at this site you will get some well reasoned arguments. If you are interested I can elaborate on why I took the plunge. My wish is for productive property(farm) when the prices come down to realistic levels.
My main reason for posting in this thread is really to urge all to stop supporting the crooked banking system with your money. Yes you can be a little safer in Kiwibank, as all their deposits are 100% guaranteed and underwritten by the assets of NZ Post, but they can change that with a months notice. But think of it like this. For every hard dollar in circulation, there are 67 electronic ones running around. So while the basic position of the bank is to leverage your money by 9x, the reality is if you have $1M then you actually control $67M, or the bank does if you give it to them for safe(!) keeping. What return are they giving you on that $67M.Lol. Take a look at M0 vs M3, which are available here under money supply.
Also be aware that 75% of M3 is debt against residential property. (see RBNZ stats)
Once you realise that the money supply is fraudulent, then it is really your duty to stop participating.
Remember metals are a store of wealth, but they are non productive.
Thanks Scarfie. I wasn't looking for advice, just alternative views. I have been a long time lurker on this site and always enjoy the robust debate and alternative views here.
It is a bloody minefield trying to chart a course towards some kind of financial security and I'm always interested in seeing what others are doing who seem to have similar views as to what the problems are. I am yet to see a coherent view as to what the solution is however at a macro level or for individuals. Many of the one's posted here and by so called experts have underlying flaws or don't apply to my specific situation. Maybe that's because there is no real solution to the position the world finds itself in. It requires a totally different paradigm which is hard to grasp without experiencing the pain of the change.
Anyway, appreciate the time you took to post.
Yes I think your analysis is quite accurate, we can't and won't know what to do. Which is probably the point of the excercise by those undoubtedly manipulating the system.
However I do think it is a case where the parasite will kill the host. I think PDK is on the money. Secure your personal food chain, your castle (no mortgage) and upskill into something useful for a resource challenged environment.
Otherwise be confident that you seem sharp enought to have foresight where others don't. Relax and enjoy life, which is really about people rather than things:)
Thanks Iain for some other great articles.
GBH said: .....and 2 : Few folks can buy a house , a farm , or create a business with 100 % personal funding.....
When herd mentality becomes a culture and people are depending on too many crooks - another sad story about people incapable of handling capitalism.
By jove , I've got it , the peso has dropped ! .... i was sitting in my bamboo hut , eating my peasants' breakfast ( tuna , red onion & tomato omelette on fresh foccacia bread ) , when it hit me like a bolt out of the blue :
Iain wants us to turn back the clocks , to the days of Muldoon & Birch ! .. he's proposing a total government control of the money supply ... bankers get drip fed the lines of credit as their masters in government dictate .
... ah , those happy carefree days , before technology took over , when cars were all built along the same lines as the Trabant . When you damn near had to give blood in order to qualify for a mortgage ... No cell phones ! Two public TV channels ...
Yes yes yes !
.. Public credit ...... that'll stop the consumer society as dead in its tracks as Kiwi-Rail . No more credit cards . No more importing stuff from overseas , except through the middlemen who own the import licenses .
.... happy daze , Parksy !
Now come on..GBH..you know that's an oversimplification to say the least..(although humorous)....Parksey in his responses has delivered on content..research..plausibility... and is deserving of our consideration when contemplating solutions to what are very real ..very dire circumstances the Global economy is faced with ..that need.. revision and change without doubt....
You Walter but despite the upstanding man his seems to be, the risk we would take with his system is what happens two generations down the track when some sleazeball puts his hand in the till? Afterall America has strayed significantly from the vision of Jeffersen.
Thank you Iain ..you may be surprised to learn it was while I was reading you posts above that he popped into my head...you have a lot of common thoughts on the matter..happy to provide you with a link if your up for it. cheers Some great work today Iain keep on at it.
Stay well.
Sarah's not stupid, she knows she's on a hiding to nothing trying to defend the indefensible.
Any fool can see how the bloated financial services sector has grown in tandem with bank created debt. Even a shill for the Big Banks can't continue the pretence that debt/credit can rise, decade after decade, at double the rate of the productive economy.
The banks have done very well, their unfortunate customers not so much. At one stage the Big Four where creaming four billion a year out of their kiwi customers - over $2500 per household per year. And that's after paying the bloated salaries, fancy premises, endless bullsh!t advertising and God knows what sleazy international profit minimisation scams. Some on this blog have said quit bitching and buy bank shares. The share price is a reflection of the banks profits not the underlying utility value of the banking sector and that's what's out of whack in my view.
Good for you RogerW.....keeping the sponsors happy with the odd PR piece disguised as an invitation to participate goes with the territory......
But to be fair about it I think she'll be swating for weeks just to catch up with what Iain's on about........Can you imagine the convo over the Corporate desk..."I'm not going in there..!
I'll get eaten ...nah ..nup.. no way .
If they were looking for feedback they got it in Spades
Iain's postion is flawed I'm afraid. He only considers how credit is created. There are mechanisms where credit is destroyed too. I like his posts though, there is something rotten in the whole festering mess. My latest thought is more along Wolly's line of thinking when he refers to banks farming us. It's not farming as we know it, it is more Imperial Plantation Owners Guild of Slavery through Debt, Insurance and Legal Contract. Very American and very nasty.
I think Ian's position is 100% correct. Credit allows financial institutions to create (or destroy money), which devalues (or revalues) everybody elses money. I am not claiming it's illegal but its like theft in a way.
This would probably be acceptable if the Reserve bank was in control (e.g through the money multiplier) but this is not the way that it works in practise. In practise commercial banks lend first and central banks expand the money supply to support the credit already out there.
Having a 100% reserve requirement would stop this and put central banks back in control of the money supply. Because the extra credit expands the money supply over time everybody needs to borrow more and more, this is why you and Wolly think that the bank is farming people I think. I don't think it's really on purpose, they genuinely didn't see the crisis coming and don't see any way out inside their policy framework.
The real issue I have with it is that it basically puts the banks in charge of the investment strategy. It deposit holders had more control over their investments, I believe that
1) there would be less socially harmful investments, people would not lend to them.
2) there would be much smaller bubbles, everybody would not have the same ideas.
Also it should basically prevent financial crisis, because the central bank could always solve a financial crisis. This would mean that NZ having 100% reserve system would be almost totally isolated from financial crisis overseas. If europe tries to carry on with the euro and collapses then so what? We don't need to worry about it, we can probably even share the surplus with aid if necessary.
Despite all this banking would look virtually the same to what it looks like right now. You could still get a loan it you needed a large amount of money, and could still invest with a bank earning interest. The main difference being when you invest with a bank you choose a type of investment (e.g asset class), and time frame to invest.
If you think Ian is wrong because credit can also be destroyed then you have seriously miss-understood what he is advocating for.
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