The Prime Minister is right to point out the banks have made too much money in this latest financial cycle.
They sure have.
Westpac New Zealand’s net profit after tax was up by 12 per cent to $1.047 billion.
The country’s largest bank, ANZ, reported a record statutory net profit of $2.299b - a rise of 20 per cent on the previous year.
It would be a surprise if the BNZ, which reports tomorrow, hasn’t also had a windfall year.
In the past, I have tended to moderate my criticism of bank profits, largely on the basis that it is a price we have to pay for the stability of the banking sector.
My views were forged watching the context of New Zealand’s banking failures of the 1980s - culminating in the collapse of the BNZ in 1990.
Then if anything it was affirmed by the relative strength of the Australian banking sector through the global financial crisis.
This financial cycle is different. It’s not actually a crisis for starters.
Billions of dollars were pumped into the economy by Government and the Reserve Bank to save businesses and jobs and avoid a crisis.
A side effect of the stimulus was a property and savings boom through 2020 and 2021.
That’s now had the galling result that a sizeable chunk of that cash looks set to line the pockets of Aussie bank shareholders.
Perhaps the banks were caught out by the surprising strength of the local economy through Covid.
But they made decisions around margins and profitability. It looks a lot like they decided to make hay while the sun shone.
That’s a legitimate business decision but bank bosses need to realise it is one that has consequences with regard to public perception.
The resulting returns should be awkward and embarrassing for them.
Bank bosses are quick to point out they have relatively low returns on assets and only average returns on equity compared to other NZX-listed companies.
Defending her bank’s big profit, ANZ NZ chief Antonia Watson said it was important to see it in context.
“Yes it’s a big number but we are a very big company. We have got ten times the capital of Spark. We have got $200 billion of assets.”
Watson said it was better to look at its profitability level which was around 13 per cent (as a return on equity).
“That’s about the middle of the road for the top NZX companies. It has actually decreased over the last couple of years because of the additional capital we have had to put in for the RBNZ.
But it begs the question: why should they expect a high return on capital?
All assets are not created equal. Banks deal in money and that money just sits there and makes more money.
The bulk of the banking they do is akin to a commodity or infrastructure business.
With the help of slick marketing and PR, the banks flatter themselves that they are playing in fast moving consumer goods sector or even the tech sector.
Banking returns should be quite low because the risks are quite low - especially when you consider they have an implicit Government guarantee.
When things actually go wrong, taxpayers have to bail them out.
It was a shrewd political move by the Prime Minister to call them out, although cynics will note that the power to do something about the banking sector rests with her.
What to do about bank profitability isn’t simple.
Windfall taxes and regulatory limits on profits sound like a bad idea to me.
It’s a slippery slope once you start to allow ad hoc political interference in the financial sector - or any sector for that matter.
Regulation needs to be carefully structured and introduced in a measured way to ensure stable conditions for companies to operate.
That’s especially true in a small open market like New Zealand which is reliant on foreign capital.
So what to do?
Sam Stubbs, chief executive of KiwiSaver fund Simplicity and a long-time critic of the Aussie banks, has pointed out three things that this Government could do if it was really serious about banking beefing up banking competition.
One is a full-scale banking inquiry of the variety they had in Australia a few years ago. I’m sceptical about how much that would actually achieve (Stubbs is too).
The other is really scaling up Kiwibank to provide serious competition.
For my money, the best way to do that is with mixed-model ownership in the style of the power companies - something this Government will never allow.
By selling off a minority stake you can supercharge growth and returns to the public.
In raw equity terms, the state now owned more than twice as much power-company then it did prior to selling off half of its stake in three of them. The only downside is that it didn’t actually add much competition to the market in the way Kiwibank could if it doubled in size.
The third idea is to progress open banking - new blockchain-based tech that allows consumers to control all their banking data and switch providers more easily
In fact, New Zealand is dragging the chain on this initiative which has been adopted in the UK and opens the market to all sorts of new players to offer retail-facing banking services.
The Banks now say the need to provision for tougher times ahead.
But while it’s clear the times will be getting tougher for mortgage holders and new borrowing will slow, higher interest rates don’t really hurt bank profits.
They give them more discretion around margins. Also - if we rely on the forecasts of their own economists - the times ahead aren’t really looking that tough, at least not unless you’re a new homeowner who has extended yourself to get into the market in the last two or three years.
On the plus side for the banks, the difficulties facing some new homeowners in the year or two ahead will provide an excellent opportunity to prove how committed they are to notions of social licence and ethical behaviour.
They should be well-buffered to work with distressed mortgage holders rather than foreclosing.
We’ll be watching closely.