This week's announcements by ANZ and Westpac of a combined $1.539 billion in net profits were remarkable.

The rest of the economy is doing it tough, with small-business profits and household disposable spending down.

Yet, in the last year, the banks produced a combined profit of $2.778 billion, up 27 per cent or $590 million from the previous year and up 3 per cent or $78 million from the previous record year of 2007.

This is amazing given lending growth across the banks in that boom year, to September 2007, was 14 per cent. In this year to September, lending growth was 1.9 per cent.


The banks have benefited from a fall in bad debts as the economy has grown, but the biggest driver has been an improvement in net interest margins. This is the measure of the "profit" banks claim after they receive interest from lending, and pay out interest to the depositors and other banks that they borrow from.

Reserve Bank figures show net interest margins have risen from 2.14 to 2.31 per cent in the last year. That increase of 17 basis points in a year, when applied across $321 billion of lending as at the end of September, equates to "extra" interest costs of $545 million in a year.

Or, if you looked at the other side of the book, that extra profit could have been used to increase term-deposit interest payments by the equivalent of $545 million a year. That would have generated extra tax revenues of about $200 million.

The banks have managed to increase their net interest margins by sitting still. The shift from fixed to floating mortgages has lifted underlying profits substantially. The net interest margin for banks has risen from 1.8 to 2.3 per cent over that period, RBNZ figures show.

If banks had shifted their interest rates by lowering floating mortgage rates and raising term-deposit rates, or a combination of both, they would have increased the wealth of borrowers and savers by a combined $2.8 billion over those two years. That wealth was instead transferred to bank shareholders in Australia.

The lack of concern about this shift of wealth from Kiwi savers and borrowers to Australian shareholders is also remarkable. No major politicians have remarked on it; only the Greens have jumped on it. Yet this is a live debate in Australia.

Interestingly, the Reserve Bank has started murmuring about banks needing to reduce profit expectations, but it has not indicated any action. It may only hit the headlines if the banks increase floating mortgage rates here next year by more than an increase in the Reserve Bank's official cash rate. Some banks may do this.

National Australia Bank, which owns BNZ, did not pass on all of an Australian rate cut this week, sparking outrage across the Tasman.


Plenty could be done about this: the Reserve Bank could, for good prudential reasons, tell banks to effectively limit their profits by holding more capital and reducing dividends. It could also force them to pass on higher term-deposit rates by funding their lending from local sources. Customers can also threaten to change banks. There is a competitive market, but only if we enforce it.