Banks' fortunes just keep on growing bigger

By RICHARD BRADDELL

If the 1980s proved disastrous for New Zealand's banks, then the decade that followed was one in which they refined how to make money, and lots of it.

As the banks licked their post-crash wounds, they renewed their focus on home borrowers, the one sector of the market that had remained faithful as corporate borrowers defaulted on loans.

So much so that the industry closed the last decade reporting record results.

For most of the nineties, the head of Massey University's banking department, David Tripe, worried that profits were falling below a benchmark of 1 per cent of assets, but more recently, his concern has been that they are exceeding it by too great a margin.

The annual results of ANZ, BNZ and WestpacTrust reported in the past fortnight would seem to bear him out, with no hint that profit growth is easing.

Once the dullard of New Zealand's banking, ANZ two weeks ago reported an impressive $280 million net profit, which would have been a stunning 26 per cent jump to $321 million but for $41 million in abnormal costs, much of which has gone towards repositioning the bank to the e-future.

Ignoring abnormals, ANZ's return on assets would have been a juicy 1.2 per cent.

Not to be outdone, BNZ a week later reported a $389 million net profit, a record for a New Zealand bank. But that record was to stand for just one day when WestpacTrust announced it had smashed through the $400 million barrier with a 23 per cent rise to $408 million.

The results might seem surprising given the squeeze on interest margins (the profit banks make on lending) due to fierce competition among the big banks and from new entrants such as AMP Banking in the home loan market.

Data in BNZ parent National Australia Bank's annual accounts shows a net interest margin of 3 per cent in Australia, or nearly 50 per cent higher than the 2 per cent in New Zealand, although the local margin crept slightly higher during the year.

But although the local banks earn proportionately less on lending than their Australian parents, there is little to suggest that they are not contributing their fair share of profits.

ANZ New Zealand, for instance, contributed 14 per cent of the group net profit, even though it represents only 12.5 per cent of assets.

There are several reasons the banks have done so well.

The first is a relentless focus on costs. While the branch closures that have unsettled customers and staff have just about run their course, the banks have encouraged customers to use more cost-effective services such as telephone and internet banking, both of which gives customers 24-hour access.

Savings have been found in other ways as well.

ANZ and BNZ have transferred processing to Australia, while products developed in Australia are being sold in New Zealand, avoiding the costs of local development.

But banks have been looking elsewhere to make a buck.

While earnings growth from lending has been modest, ANZ, BNZ and WestpacTrust enjoyed double-digit income growth from other sources, such as funds management and life insurance sales.

In the business market, BNZ and WestpacTrust are both claiming leadership.

In fact, WestpacTrust's astonishing profit growth did not come from the retail market, where its performance was relatively static.

Instead, it owes much to success in the business market after an attack spearheaded by group managing director David Morgan a couple of years ago in which Westpac set out to capture the leading position with large companies.

Indeed, WestpacTrust's corporate business was the only bright spot in a recent customer satisfaction survey by Auckland University marketing department, which found the bank had dived below ANZ as least-liked bank by its retail customers, but was well regarded by business customers.

The news was not good, since WestpacTrust had been hoping to rebuild customer loyalty, having completed the merger with Trust Bank, which gave it the largest retail business of a New Zealand bank.

But regaining customer trust is a long, arduous path. BNZ was once the bank everybody loved to hate. But the Auckland University survey found it was rapidly catching up with the leaders, ASB and National.

Given that perception usually lags reality, it is probably further ahead than the surveys suggest.