Some banks have recently posted their annual results, which has brought attention to increased profits. So why do banks need to make money and what else is going on here?
Most people understand that a strong banking sector underpins our economy because banks provide finance to businesses and home-owners.
Banks must make returns to continue operating. Unprofitable banks result in bank failure that can have a catastrophic effect on national and regional economies.
The 2008 banking crash in Iceland provides an extreme example of this. See also what's going on in parts of Europe right now.
By contrast, New Zealand banks served us very well during the global financial crisis. None failed, and none was bailed out by the government.
Any discussion on bank profits needs to be viewed in the context of banks' contribution to New Zealanders and the New Zealand economy.
Banks invest heavily in New Zealand.
Last year banks made a direct contribution to the New Zealand economy of around $6 billion. That's made up of the $4.5 billion cost of running their businesses here, which includes payments to over 25,000 employees and New Zealand businesses that supply goods and services to the industry.
In addition to that operational expenditure, there's $1.3 billion that banks paid in tax, which is roughly equivalent to the operating budget for the New Zealand Police.
Apart from this net economic benefit to New Zealand, banks provide essential services which we often take for granted.
As well as providing lending and investment opportunities, banks offer a range of products and services to enable consumers and businesses to transact with others, such as ATM and branch networks, online banking, and mobile banking. Many banks also offer general and life insurance, KiwiSaver schemes, and investment funds.
Banks also provide financial advice.
Bank profits look big because banks are among our biggest businesses. Even smaller banks have large balance sheets in comparison to other New Zealand businesses.
When looking at these returns it's also useful to look at the return on assets. New Zealand banks have an asset base of around $395 billion. 2011 profits of $3.3 billion represent a return on assets of around 0.84 per cent, which is not excessive compared to other major businesses.
New Zealand banks operate in a very competitive and efficient environment by global standards.
We see this in product innovation and also in customer service. Barriers to entry to the New Zealand banking market are low, which is demonstrated by the registration of new banks in the past few years.
The banking industry's initiative in 2010 to make it easier for customers to switch banks was all about making an already competitive industry even more so.
This is now being borne out in a range of banks' marketing campaigns, not to mention fiercely competitive interest rates for both loans and deposits. It's also evident in high customer satisfaction ratings.
A recent Consumer NZ survey found that banks outshone other industries with an overall satisfaction rating of 92 per cent.
Banks work hard to attract and keep their customers, and have lifted their game in recent years.
As the Reserve Bank pointed out in its May 2012 Financial Stability Report, this competition is set to increase as banks respond to lower credit demand.
This will likely result in downward pressure on bank net interest margins, which are already lower than pre-global financial crisis levels. Banks also need to contain costs.
It's an increasingly lean game.
In this competitive sector our banks earn realistic returns for their shareholders considering the size of their businesses and their risk profiles.
In a downturn, as in 2009, many banks had flat or low returns.
This was in part due to bad debts through customers being unable to repay their loans.
Recent increased returns were largely driven by a reduction in bad and doubtful debts rather than strong earnings, due to the subdued economy.
The major banks' provisioning for bad debts has decreased year on year from $2.135 billion in 2009, to $812.7 million in 2010, to $548.5 million in 2011.
Banks are big contributors to the New Zealand economy and make realistic returns within a competitive environment.
While providing a return to shareholders is important in terms of ongoing investment in New Zealand, banks do a great deal more than that.
Kirk Hope is chief executive of the Bankers' Association.