Is NZ developing a two-tier banking system? There’s concern smaller savings institutions may be impacted, if customers follow Americans' flight to big banks this week. Jonathan Milne reports.
There is a "very real possibility" that the cost of doing business in NZ may force the closure of some smaller banks, a new report warns.
It foreshadows pressure on smaller banks in the US and around the world, after the collapse of Silicon Valley Bank in California, with US$212 billion in assets. Signature Bank ($116b) has been shut down, and pressure is mounting on First Republic Bank ($198b).
The Financial Times reports that large US banks are being inundated with requests from customers trying to transfer funds from smaller lenders, as the failures result in the biggest movement of deposits in more than a decade.
READ MORE: * NZ fund’s $6m exposure to bank collapse amplifies calls for local protection * Reserve Bank would back a Commerce Commission into bank profits * Victoria Carter: Bringing banks to social account
That's easier now: Nobel laureate economist Joseph E Stiglitz says new technologies have increased the risk of bank runs. "It is much easier to withdraw funds than it once was, and social media turbocharges rumours that may spur a wave of simultaneous withdrawals."
The annual KPMG Financial Institutions Performance Survey, published this week, says added compliance costs are becoming too much for some small banks, which are struggling to afford to keep operating here. That's especially so for branch banks, serving niche New Zealand markets for their overseas parent companies, as a review considers whether they should still be allowed to take deposits here.
"It would be saddening if we reached a point where some of the smaller banks in the banking sector are forced to close due to the outcome of regulatory change, for example, branch consultancy, Deposit Takers Act, or New Zealand simply being seen as a place that was either too hard or too expensive to do business in," the report says.
NZ banks' leverage of shareholder funds
"This is a very real possibility with the increased burden of regulation making it difficult for some to remain profitable."
The survey confirms total bank profits have surged to a record high despite a slowing economy, rising interest rates, and strong inflation. The sector made a record $7.18b in profits for the year ended December as lending increased, bad debts remained low and margins increased. That's 17.3 percent higher than 2021, despite a slowing economy.
In the KPMG report, Massey University economics professor Dr Christoph Schumacher forecasts profits before tax will top $10b for the first time this financial year.
But most of the profits are at the bigger banks: the after-tax profits of the big four increased to $6.44b in 2022. By contrast, four of the 20 survey participants experienced reduced net profits in 2022 – the commercial branches here for overseas-based JPMorgan and MUFG banks, and the smaller local banks Co-op and TSB.
“It’s not just banking. Have a look at electricity. Have a look at groceries. Have a look at everything. The little guy is just getting milked to death." – John Tamihere, Te Pāti Māori
At the start of this year, the most heavily leveraged New Zealand banks were Kiwibank, Westpac, Co-op and TSB. The customer-owned Co-operative Bank's total debt assets, for instance, were $3.3 billion – that's 12½ times the $266m in shareholder funds underpinning the lending. (That's third highest of the 15 locally incorporated banks, but Co-op argues it's not much higher above average for the eight main retail banks).
Last year, after delays because of Covid, the Reserve Bank began phasing in increased capital adequacy ratios for NZ banks. By the end of 2028, New Zealand's four biggest banks – dubbed the "domestic systematically important banks" by regulators – must have a total capital ratio of 18 percent, half of that in "high quality" CET1 capital. Others bank must have 16 percent total capital ratio – because it's considered that the impact of them failing would not be critical to the New Zealand economy.
At present, the four big banks have total capital ratios ranging from Westpac's 14.2 percent to ANZ's 16.4 percent as they gradually push up to the 18 percent mandate. But without so much pressure to improve their capitalisation, most of the smaller banks are far behind: TSB and Heartland have just 13.1 percent total capital ratio; Kiwibank and SBS are not much better. Only Co-op is on target.
Professor David Tripe, of Massey Business School, says: "Smaller banks are likely to be suffering from diseconomies of scale, in that they cannot spread the costs of regulation, compliance and technology across as large an asset base, which means that their costs are relatively significantly higher than for the big banks, which thus imperils their profitability."
NZ banks' net interest margin (%) exceeds forecast
The big banks have been accused of clipping the ticket by everyone from Reserve Bank chief economist Paul Conway, in the Newsroom interview that kicked off the discussion, Kiwisaver fund founder Sam Stubbs, through to Labour and the Greens, National and just this week, Te Pāti Māori president John Tamihere. He says Australian banks make higher profits out of New Zealand than they do across the Tasman, and an inquiry is long overdue.
Governments are there to regulate abuse and misuse of authority and power through cartels or monopolies. “It’s not just banking,” he tells Waatea News. "Have a look at electricity. Have a look at groceries. Have a look at everything. The little guy is just getting milked to death."
The chorus of voices has prompted the new Commerce Minister's strongest signal yet that he’ll order a Commerce Commission study into bank profits.
Minister Duncan Webb says he's actively and carefully considering the matter. "If we do a market study into banks we want to get the front end right, make sure we get the terms of reference appropriate, so we're taking advice from the Commerce Commission and officials on that," he says.
"It's really important to know where to look, the scope for the inquiry – whether it's more into mortgage rates, or whether it's a more broad-based inquiry – but we're certainly not going to let the banks off the hook."
"There’s a long, ugly history of politicians targeting bankers to whip up political support. Bashing the banks because they’re Australian panders to xenophobia. Obsessing over profit-making and demands for an 'excess' profits tax reflects deep economic illiteracy." – David Seymour, Act Party
First ASB, then ANZ, have told Newsroom they will welcome an inquiry into their profits – that they have nothing to hide.
ASB spokesperson Holly Ryan says New Zealand banks operate in a highly competitive environment and, there are a number of metrics that can be used to measure banks’ performance. "ASB would welcome an inquiry into the banking industry in New Zealand," she says. "Should the Commerce Commission choose to hold a market study ASB would naturally co-operate fully and respond to any information requests received."
Similarly at ANZ, where external communications head Briar McCormack also says New Zealand has "a very competitive banking sector" with 15 locally incorporated banks.
"The cost of living is front of mind for New Zealanders right now so it is understandable that many are questioning what various industries are charging them," she says. "We’ll always endeavour to offer a competitive rate for our customers and would welcome an examination of banking competition in New Zealand. We would of course cooperate if there was a market study by the competition regulator."
The smaller Co-operative Bank, too, says it's interested in the proposed inquiry. "We would expect the focus to be on the Australian-owned banks which still dominate market share in New Zealand," says chief financial office Bevan Miller. "We would support any recommendations that make switching banks easier, such as account number portability."
"With regard to a Commerce Commission inquiry we are interested and would expect the focus to be on the Australian owned banks which still dominate market share in New Zealand... We would support any recommendations that make switching banks easier, such as account number portability." – Bevan Miller, The Co-operative Bank
Miller argues that, in fact, Co-op provides a strong, well-capitalised, New Zealand-owned alternative to the big four banks.Because its owned by its customers, it can deliver a sustainable modest return. "Like some other smaller NZ Banks, we do not require the same level of profits, so we can be very competitive on prices for customers and therefore do not fear taking on the larger players."
Compared to smaller banks in the US, The Co-operative Bank is in quite a different position. The high concentration of risk in the Silicon Valley Bank example is in contrast to Co-op, a retail bank serving only personal customers. Co-op has a higher volume of customers with lower individual deposits, Miller says.
The NZ Banking Association argues that banks make a net positive contribution to the economy. Yes, they took out profits of $7.18b, but they also spent $6.35b running their businesses here, and paid $2.75b in tax.
"We often hear about bank profits going overseas," says chief executive Roger Beaumont. "That’s half the story. Banks also spend a lot of money here and pay a lot of tax. They actually spend more here than they take away in profits.
"You might think of profits as something banks take out to pay shareholders for their investment and to reinvest in their business. On the flipside, they also put money into our economy by running their businesses here and paying tax."
He says the net positive contribution to the economy is $1.92 billion. "And that’s before you take into account the contribution banks make in funding household and business needs."
There have been few dissenters to the chorus of criticism of bank profits. One of those few is Act leader David Seymour. "There’s a long, ugly history of politicians targeting bankers to whip up political support," he says. "Bashing the banks because they’re Australian panders to xenophobia. Obsessing over profit-making and demands for an 'excess' profits tax reflects deep economic illiteracy."
Correction: The smaller banks are required to increase their available capital to 16 percent by 2028, not to 9 percent as previously reported.
