By Bernard Hickey
This week's announcements by ANZ and Westpac of a combined NZ$1.539 billion in net profits were remarkable in two respects.
Firstly, the rest of the economy is doing it very tough with small to medium business profits down and household disposable spending down. After four years of recession or near recession it doesn't feel like the boom time of 2007 again. Yet the banks, including ASB and BNZ, produced a combined profit in the last year of NZ$2.778 billion, up 27% or NZ$590 million from the previous year and up (yes up) 3% or NZ$78 million from the previous record year of 2007.
See Gareth Vaughan's article on ANZ's profit, on BNZ's profit, on Westpac's profit and ASB's profit.
This is doubly amazing given lending growth across the banks in that boom year to September 2007 was 14%. In the just completed year to September lending growth was 1.9%.
The banks have benefited from a fall in bad debts as the economy has crept out of recession, but the biggest driver has been an improvement in their net interest margins. This is the measure of the 'profit' the banks claim after they receive interest from their lending to businesses and households and pay out interest to the depositors and other banks that they borrow money from, both here and offshore.
Reserve Bank figures show net interest margins have risen from 2.14% to 2.31% in the last year. That increase of 17 basis points in a year doesn't sound like much, but when applied across NZ$321 billion of lending as at the end of September, that equates to 'extra' interest costs of NZ$545 million in a year. Or, if you looked at the other side of the book, that extra profit could have instead been used to increase term deposit interest payments by the equivalent of NZ$545 million a year. That, by the way, would have generated extra tax revenues of around NZ$200 million.
The banks have managed to increase their net interest margins by sitting still. The shift from fixed mortgages to floating mortgages has lifted net interest margins and underlying profits substantially in the last two years. The net interest margin for banks has risen from 1.87% to 2.31% over that period, RBNZ figures show. If banks had shifted their interest rates by lowering floating mortgage rates and raising term deposit rates, or a combination of both, they would have increased the wealth of borrowers and savers by up to NZ$2.8 billion over those two years. That wealth was instead transferred to bank shareholders in Australia.
The lack of public debate and concern about this shift in wealth from New Zealand savers and borrowers to Australian shareholders is the second remarkable feature of this week's announcements. None of the major politicians have remarked on it. None of the major newspapers are noting it. Only the Greens have jumped on it. This is a very live debate in Australia, yet not here.
Interestingly, the Reserve Bank has started murmuring about banks needing to reduce their profit expectations, but it has not indicated any action. If may only hit the headlines if the banks decide to increase floating mortgage rates here next year by more than an increase in the Reserve Bank's Official Cash Rate. Some banks have suggested they may do this. National Australia Bank, which owns BNZ, did not pass on all of an Australian rate cut this week, sparking outrage across the Tasman.
Plenty could be done by the regulator and by customers. The Reserve Bank could, for good prudential reasons, tell banks to effectively limit their profits by holding more capital (particularly against property lending) and reducing their dividends. It could also force them to pass on higher term deposit rates by forcing them to fund their lending from local term deposit sources, rather than cheaper hot foreign money..
Customers could play their part by threatening to change banks. I managed to reduce the floating rate on my mortgage by 36 basis points by using a broker to threaten to move. There is a competitive market, but only if customers, regulators and politicians enforce it.
|
Bank |
Annual Net Profit |
% growth |
|
ANZ |
1,085 |
25% |
|
ASB |
568 |
42% |
|
BNZ |
671 |
12% |
|
Westpac |
454 |
41% |
|
Total |
$ 2,778 |
27% |
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