Banks’ net interest margin hits 8-year high

Banks’ net interest margin rose by 6 basis points in the final three months of 2022 to an eight-year high. Photo / NZME

Bank profitability, measured by net interest margin, hit an eight-year high in the December quarter.

According to data collected by the Reserve Bank, banks’ net interest margin rose by 6 basis points, to 2.37 per cent, in the final three months of 2022.

The margin last reached this level in December 2014. The last time it was higher was in June 2006, when it hit 2.50 per cent.

The net interest margin is the ratio of net interest income to average interest-bearing assets.

It is an indicator of how effectively a bank uses its funding to generate revenue.

Because banks also earn revenue from fees, the net interest margin doesn’t provide a complete picture of a bank’s profitability.

Other measures of profitability were stable in the December quarter at pre-Covid levels. Banks’ return on equity was 12.9 per cent and return on assets 1.1 per cent.

The newly-published data comes as Reserve Bank Governor Adrian Orr last week said he wanted to see banks increase their term deposit rates.

Orr argued term deposit rates need to rise to encourage people to save to help cool economic demand and dampen inflation.

The Reserve Bank, in its February Monetary Policy Statement, explained “deposit rate increases continue to lag the increases in wholesale and mortgage rates, resulting in a further widening of bank margins between lending and deposit rates”.

It said it expected “deposit rates to increase over the coming year, incentivising savings, further dampening inflation and supporting the maintenance of current mortgage rates for a longer period”.

Speaking to the Herald, Massey University banking professor David Tripe said one of the reasons banks are making more from products they receive interest on (like mortgages), versus products they pay interest on (like term deposits) is because of the mix of products savers are using.

When interest rates were at rock bottom in 2020 and 2021, people took their money out of term deposits and put it in more liquid current or savings accounts.

As interest rates started rising, it took savers a while to put their money back in term deposits, which pay more interest than regular savings accounts, so cost banks more.

Tripe believed there was room for banks to pay savers more for cash they keep in savings accounts.

A former Westpac treasurer turned consultant, Jim Reardon, also made the point banks were well funded in the December 2022 quarter, so didn’t need to work super hard to attract funding from depositors.

Demand for mortgages was low and they had access to cheap funding via the Reserve Bank’s Funding for Lending Programme.

However, with that Covid-era programme ending in December, banks have had to rejig their funding mixes and lean more heavily on wholesale funding.

Reardon said more reliance on this type of funding would eventually need to be balanced against funding from deposits. Accordingly, he believed deposit rates would rise more from around the middle of the year.

Taking a bigger picture view, Tripe said bank profitability could vary a lot across large and small banks.

He didn’t support the Green Party’s idea of introducing a tax on banks’ super profits.

He said this would be hard to define and feared it would cause banks to become more risk averse when it came to lending, possibility to the detriment of higher risk borrowers like businesses.

Tripe also worried it would put even more pressure on smaller banks, already grappling with higher regulatory and technology costs.

Finance Minister Grant Robertson isn’t a fan of taxes on super profits either.

“I am wary of windfall taxes because of the exact word that sits in there – what is and what isn’t a ‘windfall’?” he told Parliament’s finance and expenditure committee last week.