The recent run of record results posted by the big four Aussie-owned banks has prompted a chorus of bank-bashing.
The criticism has been bi-partisan, which is a bit surprising because the National Party usually re-runs the Bankers' Association talking points.
The general idea however has been the one articulated by the Prime Minister, that the banks risk compromising their 'social license' by 'extracting high profits'.
For my part, I have been a long-time critic of the leverage banks are allowed to run under Basel III regulation.
However, much of this can be subject to fact-checking. And a debate about bank profits would be better after agreeing some basic facts.
1. How much did the big-four Aussie banks earn in the latest year?
First we should note that they report different 'years'. For ANZ, BNZ and Westpac it is a September year. For ASB it is a June year. But the Reserve Bank's Dashboard reveals a consistent comparison, and that is only out to June so far. The September update is due on November 28.
We can look at these results in their after-tax quantum, and their return on equity. (Banks would like you to look at their return on assets too, because that is a small number, but we will ignore that temptation).
| Year to June 2022 | Year to September 2022 | ||
| Profit | Return | Profit | |
| after tax | on Equity | after tax | |
| $ bln | % pa | $ bln | |
| ANZ | 2.213 | 12.5% | 2.299 |
| ASB | 1.470 | 14.8% | n/a |
| BNZ | 1.430 | 13.4% | 1.414 |
| Westpac | 0.941 | 10.7% | 1.047 |
| --------- | -------- | -------- | |
| All four | $ 6.054 | 12.8% | $ 6.260 |
| after tax paid of ... | $ 2.531 | $ 2.606 | |
It is useful to look at the June result, because the Crown Accounts can give a useful perspective, and they were released recently to June 2022.
That reveals the total tax paid by all companies in New Zealand, amounting to $19.9 bln. So these four banks paid one eighth (12.7%) of all tax collected. The Government is highly invested in these tax collections.
Unlike other large companies, especially multi-national corporations, our big banks don't fudge the tax. They pay the full rate (after having been beaten by the IRD in some decades-earlier tax court cases).
2. Do banks earn too much?
There will be a lot of politics in how people think about this question. But we will look at it narrowly, in terms of profit growth over a long period (since before the GFC), and how it compares with other large non-bank businesses operating in New Zealand.
It is hard to know what is a sensible base to compare current profits with. One implied criticism is that they "have grown too much."
There is no great rationale to choose a particular base date, but we chose the start of 2008, not only because we have good data from then, but it pre-dates the Global Financial Crisis, and the turmoil it generated subsequently. And we have good comparative data from the Crown Accounts on overall company profitability to compare it with.
In 2008 bank profits were $3.1 bln after paying $1.3 bln in taxes.
If those profits rose at the Consumer Price Index rate subsequently, the level of bank profits would have risen to $4.5 bln after paying $1.75 bln in tax. By that standard, banks would have earned $1.5 bln less in 2022 and paid $780 mln less in tax.
For most companies, there seems to be a bit more under the line than over it. For banks it edges the other way. But over a long period it is hard to make the argument that profits have been materially higher than inflation, for either.
Another way of looking at bank profitability is to challenge the 12.8% return on their shareholders investment.
Perhaps a comparison could be with the ten largest companies listed on the NZX.
| NZX listed | Return on | Shareholders | NPATx | ||
| 2022 | Equity % pa | Funds $ bln | $ bln | ||
| 1 | FPH | F&P Healthcare | 49.2% | 0.766 | 377 |
| 2 | SPK | Spark | 27.7% | 1.480 | 410 |
| 3 | AIA | Auckland Airport | 2.4% | 8.150 | 192 |
| 4 | MFT | Mainfreight | 24.8% | 1.430 | 355 |
| 5 | IFT | Infratil | 24.0% | 5.140 | 1.232 |
| 6 | EBO | EBOS | 9.4% | 2.150 | 202 |
| 7 | CEN | Contact Energy | 6.4% | 2.840 | 182 |
| 8 | MEL | Meridien Energy | 12.0% | 5.520 | 664 |
| 9 | ATM | a2 Milk | 9.6% | 1.200 | 115 |
| 10 | FBU | Fletcher Building | 11.5% | 3.760 | 432 |
| Top 10 | 12.8% | $32.4 | $4.1 |
There are companies in this group who have a very much larger return on their shareholder investment than any bank, and others that have less. But on average, the two sets are very little different. It is hard to sustain an argument that 12.8% is unusual or out of range.
You might argue that banks are protected by regulation. While this might be true, it also limits what they can earn and how they earn it. Those public restrictions come at the 'cost' that shareholders will want a 'fair' return to allocate capital to a highly regulated industry, and a benchmark return like the average of their listed peers doesn't seem unreasonable.
One thing the Reserve Bank has done, and I greatly support, is require these banks to hold more capital. (They just haven't gone far enough in my view). Plus the Reserve Bank sharply restricted what they can remit to their parent owners in terms of dividends during the initial Covid-19 period. It is a fine balance, but shareholders would be naturally reluctant to apply more capital after being restricted to access from dividends. A 'reasonable return' is the quid pro quo. And the NZX comparator makes for a sensible standard.
26 Comments
Big numbers excite people.
It's like the supermarkets, seem like robbers, but I believe their profits break down to every person in NZ paying the supermarkets 25 cents a day to store and refrigerate food for people to go uplift whenever the feeling suits.
Doesn't seem excessive once you break it down.
... remember all that media babble about supermarkets profiting by $ 1 million per day ... social media was in a frenzy , Megan Woods flailing around alike a hippie on speed announcing a Com Com investigation into the horror of it all ...
And the Gummster thort : " 5 million of us , $ 1 million per day ... 20 cents profit daily from each of us ... minuscule , really .. "
... maybe someone should define exactly what an " excess profit " is ... precisely how much ... because lest my memory fails me , this government shut down all sources of food except for the major supermarket chains during Covid19 lockdowns ...
Now they whinge that those self same supermarkets are making " excessive profits " ...
... there are alternatives to Foodstuffs & Progressive , now ...
The Com Com would have it all defined, and guessing it is following some form of standard. But the fact is if you go to the UK, you will see how cheap food is over there in place of Aldi and Asda. NZs supermarket are priced similar to their premium stores. If you watch this guys videos,https://www.youtube.com/watch?v=MwyzC446unE&ab_channel=BaldFoodieGuy he compares the cheaper brands, with the top brands, and the food often tastes the same or very similar. NZ has cheaper budget no name brand food, such is tins imported from Italy, but we can still be l paying multiples more for them, than they pay in the UK, for what could be the identical product rebadged.
Yeah but what do banks do for you, especially their super highly paid executives? I can't even do a inter-bank transfer in the weekend.. it's 2022.
The less money you have the more they charge you in interest i.e. low equity loans.
Need a branch - haha good luck with that.
Need advice - scripted partonising fluff.
... point of fact : the RBNZ are doing it to you/us ... they draw up the rules which banks must comply with ... and those rules are so onerous they stifle competition ... only the bigger incumbents can afford the teams of accountants & advisors to pick through and abide by the layers of compliance ...
Start ups , innovative competitors are killed off at birth ...
Good article thanks.
1) those ROE numbers are based on book or market value of equity? Should be market value for non financials (more acceptable for financials unless bad debt provisions are inadequate or high level of illiquid assets).
2) then, better to compare ROE against banks globally rather than mish-mash of local listed entities.
The big question is to what extent do banks here have an implicit guarantee from the taxpayer versus comparisons? To the extent they do, that should reduce their RoE substantially, through regulation, guarantee fees etc. Agree the RBNZ has done a good job of demanding greater capital, despite fierce opposition, as this both reduces ROE and requirement for implicit governmental support.
The government spotlight is upon all business owners now , David ... eat your smashed avocado on toast in the privacy of your own home , turn the light off ... lest you too are deemed to be a maker of super profits ... and the ravenous dogs of hell are unleashed upon interest.co.nz ... the IRD cometh for thee ..
So it should be. If the worker's share as a percentage of productivity/outputs is the same today as it was 20 to 30 years ago then there's nothing to see here. But if businesses are suppressing wages while price gouging at the same time, reducing the general quality of life of everyday NZers, then that needs to be identified and potentially addressed.
Or are you happy for multi-national corporates to suck the life blood out of our country?
Where has the Government picked favourites that has resulted in, for example, a supermarket duopoly and various anti-competitive tactics within the building materials industry? An open economy with 100k migrants p.a. who will gladly work for nothing and erode the general quality of life of the average worker by enabling a wage Dutch auction?
For the Government to properly set the rules, sometimes the spotlight needs to be put on things. Would you rather they just make decisions without facts or consultation like they have previously? That's the purpose of the working groups that everyone bemoans isn't it?
Perhaps the discussion should be around what constitutes a socially acceptable profit margin. 12% seems high to me. Except the argument goes ‘why would anyone invest in a productive enterprise that did not return any more than term deposits and bonds?’ This seems to be a discussion about the social license of this current form of capitalism. A company I am familiar with regularly made what was considered by employees as ‘obscene’ profits. Which turned out to be 12%. Always depends on the capital/equity outlay. The headline number is the toughest one to sell to the public.
Regular viewers of the comments section might find my view on our very profitable banks surprising. I have run all of the numbers in this article a few times (and more from the fabulous RBNZ S21, C35 and C5 datasets), but the number that I find most useful is missing: profits as a % of the loan book.
Our banks are basically lending machines - they supply us with credit money to buy houses (mostly) with a sideline in business loans, settling payments and selling bonds etc. Banks make their big money by charging more interest on loans than they pay on deposits and their profits stick religiously to around 1.75% of total loans - dipping briefly below 1.5% when things get wobbly.
So what happens when RBNZ juice the housing market and we all go on a borrowing spree? Bank profits go up in nominal terms - but profits as a % of loans (assets, equity etc) stay broadly constant. What do we expect banks to do, reduce their margins when they do more lending?!?
If Govt (or the Greens etc) want to actually reduce bank profits, then they should accept that banks are licensed to make a given amount of margin, and change the licence. Or, if Govt wants more rapid change, they should offer state-backed mortgages through Kiwibank for owner occupiers at OCR + 75 pts (fixed for remaining term, <$1m only) and take the mortgages onto the Govt balance sheet as assets - voila, Grant has reduced Govt debt to zero, what a hero.
I would look at it as their "product " been the interest charged on mortgages . So if they are paying 4% to access money , and lending it out at 6
% , their markup is 50%. I don't really see a lot of expenses in making such a loan , so tend to view them as rather inefficent.
... spot on ... the very government who are mealy mouthing about a " social license " are the ones who along with their buddy at the RBNZ set in train a set of circumstances which led to the banks recording bigger profits than usual ...
And , as usual , the media leapt in & whipped up a firestorm about windfall profits or excessive profits . . Because our media are just that shallow & stupid ... few of them know what the heck they're bellyaching about ... they're just in it because that seems to be the popular side of the public debate ...
For me the issue isn't just the "$1b" figure which has been getting thrown around in the media. My issue with profits this size is twofold:
- Yes looking at it as a percentage of assets makes it look a lot less impressive. But does it make sense to allow a single entity to hold such a huge portfolio of assets, especially such a systemically important entity as a bank?
- Do they deserve it? That's not a rhetorical question. Is their service to society really that valuable? Or are they just using their largesse to impose themselves on society in such a way as to make themselves important?
I guess the second point is a question for the regulator, and as such is likely to go unanswered. As for what Ardern or Luxon think about it, I'm not sure anyone really cares.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.