Looking at bank profits

Pressure is building up for a formal inquiry into bank profitability in New Zealand. Two things are driving this. First, the level of profits of the New Zealand banks is higher than in most other OECD countries. Second, while the cost of living has been rising in New Zealand  over the last two years and many households are under significant financial pressure, banks’ profits have been rising strongly.

Peter Nicholl

Banks have also distanced themselves from their customers over the last two decades by cutting out a number of services that customers found useful, like buying and selling foreign cash, and charging higher and higher fees on almost all banking services they still provide. Banks used to encourage their customers to visit their bank branches but now it seems that they would prefer them to stay away and do all their banking on-line.

When I was growing up in Cambridge (a long time ago!!) the local bank branch managers were well-known and important people in the town. Now I, and I suspect most other people living here, can’t name one bank branch manager.

Australia had a major Royal Commission into their banking system in 2018. But that commission focused on conduct issues rather than profitability – and what it found was alarming. New Zealand did a follow-up review as the banks that were found to be behaving badly in Australia were also our biggest banks. While the New Zealand review did not find the banks were squeaky-clean in New Zealand, the conduct and culture problems were found to be much less widespread here than they were in Australia.

But when it comes to profitability, the boot is on the other foot. The profit level of the Australian-owned banks that dominate our banking system are significantly higher in New Zealand than they are for the same banks in Australia. I have never heard a good explanation from the banks for this. It seems hard to explain it in any other way than a lack of competition in the New Zealand  banking market. Even the Reserve Bank of New Zealand said publicly recently that they would support an inquiry into banks’ profits, saying that the banks here have been quick to increase their mortgage rates as monetary policy tightened but have been slower to raise their interest rates on deposits.

Two different types of inquiry have been suggested. One is a relatively quick, and probably shallow, inquiry by a Parliamentary Select Committee. The banking industry has said they would welcome such an inquiry. The other is a more detailed market study by the Commerce Commission. I have not seen a statement from the banking industry that welcomes this option. It would clearly be more expensive for the industry and shine a lot more light on industry practices. It therefore should be the option the Government adopts.

My concern is that the Commerce Commission has already done three of these market studies: into petrol prices, supermarkets and building supplies. Their reports had lots of criticisms but have led to little concrete action to increase competition in any of the three industries. If the same happened with a market review of the banking industry, it would be an expensive waste of time.


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