“We need to attract that capital into our country.”
ANZ NZ reported a return on equity of 13.1% in the June quarter – a result a little above the three other big Australian-owned banks, and well above that of the smaller banks, with Kiwibank reporting a return on equity of 7.5% and TSB of 5.0%, for example.
Watson argued ANZ NZ’s return on equity was in the middle of the road when compared to other companies listed on the New Zealand stock exchange.
However, Salt Funds managing director Matthew Goodson estimated the median NZX-listed company would have a return on equity of around 9%.
“Clearly the banks are far more geared,” Goodson said.
“The issue for the banking sector is that it’s less risky until it is; until something goes badly wrong, which you do not want to happen.”
Nonetheless, Goodson said it was “crystal clear” the big four banks in New Zealand were earning excessive returns.
“That’s because of their scale,” he said, noting the regulator, the Reserve Bank, doesn’t require New Zealand’s larger banks to hold as much capital against their lending compared to the smaller banks.
As for comparing ANZ NZ to ANZ Australia, Watson said, “We pay more than our Australian colleagues to fund our bank, because New Zealand is perceived as a more risky market ... We’re a small country, we’re very isolated from our trading partners, we’re at the bottom of the world, we’re subject to weather events, we’re subject to earthquakes, we’re a price-taker in export markets.”
Watson also defended the fact ANZ NZ is more profitable than many banks in other countries.
According to Commerce Commission and Reserve Bank analysis, the average annual profitability of the New Zealand banking sector exceeded the upper quartile of a sample of comparable countries’ banks between 2010 and 2021.
Watson talked down this comparison.
“Do we want to compare ourselves to that rump of countries in the middle, who have experienced banking crises, whose banks are trading at below their book value?” she said.
Goodson recognised the big four Australian-owned banks were trading above their book values.
“That’s the market telling you they’re earning excess returns, or also that the share price is a bit dear.”
Goodson said the benefit of the Australian-owned banks having the scale to make them very profitable was that it made the financial system stable, as Watson suggested.
The downside is that their margins are higher. They charge borrowers quite a bit compared to what they pay savers.
ANZ NZ reported a net interest margin of 2.4% in the June quarter.
Watson acknowledged the bank’s net interest margin rose in recent years, as interest rates around the world shot up.
She said this was partially because it took savers a while to switch their money from transaction accounts, which don’t pay much interest, to term deposits, which pay more interest.
Watson said banks’ net interest margins should fall if interest rates come down quickly, as they’re expected to.
She denied the assertion that ANZ NZ would be slow to cut the interest rates it charges borrowers and quick to cut the rates it pays savers.
Watson was joined by ANZ NZ chair Scott St John before the select committee.
Other big and small bank chairs and chief executives will similarly appear before the committee in the coming weeks.
The committee’s inquiry comes on top of the Commerce Commission’s market study, which wrapped up in August.
The Government is still considering its response to this inquiry, including whether it will part-privatise Kiwibank to broaden its access to capital, and how much weight it will make the Reserve Bank put on competition as it regulates banks in such a way that ensures the financial system is stable.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
