Encouragingly the Commerce Commission market study into retail banking appears set to probe four key issues. However, whether it achieves much for retail banking customers remains to be seen, it won't address business banking, and leaves the elephant in the broader room of the New Zealand banking economy untouched.
The four issues I'm encouraged to see under the spotlight are barriers to new competitors, innovation, switching between banks and profitability.
“The Commerce Commission will focus on examining barriers to new competitors entering or expanding in the market, the introduction of innovative products and services and consumers’ ability to switch between banks," Commerce and Consumer Minister Duncan Webb said in Tuesday's announcement.
“As part of the study, the Commission will examine banks’ profitability and other financial measures to assess competition in the sector."
There's existing competition to the oligopoly of the big four banks but it lacks teeth. In key areas the NZ banking sector's an innovative laggard, switching is straight forward but not well understood, and the big four's profits are high by international banking standards. There is certainly scope to improve the lot of the NZ retail banking customer.
Back in March I wrote about how a simple - but not widely understood - bank switching process has been in place since 2010. Consumer NZ’s latest annual banking survey provides evidence of the low number of people who switch banks, with just 4% doing so, unchanged year-on-year. Moves to improve public understanding of how easy it is to move between banks are welcome and long overdue.
That same article also looked at how NZ's a laggard in payments innovation, where the bank-owned Payments NZ governs NZ’s core payment systems. NZ has also moved at a glacial pace on open banking, and fintechs have made little impact. So any moves to encourage innovation are also welcome.
The competition's there but it's miniscule
In the March article I also noted there are 15 or 16 banks offering mortgages and term deposits, plus a range of building societies, credit unions and other non-bank lenders, but the oligopoly - ANZ, ASB, BNZ and Westpac - continues to almost completely dominate the NZ retail banking market with 85% to 90% of mortgage lending and deposits.
Greater public awareness of the ease of bank switching could help. But also the likes of Kiwibank, TSB, The Co-operative Bank and others could promote switching much more than they have. Having been left out in the cold during the Covid period, politicians now appear to be considering the role of building societies and credit unions. They're talking about making the Deposit Takers Bill, which will regulate banks and non-bank deposit takers together rather than separately as is now the case, more friendly to the likes of building societies and credit unions.
And the Reserve Bank has launched a review of its Exchange Settlement Account System access policy and criteria, through which it'll consider offering broader access to settlement accounts, including potentially to non-bank deposit takers.
The non-banks play a useful role in some regions and communities. However, they are miniscule with, for example, just $5.7 billion, or 1.64%, of total outstanding housing lending. Banks hold the other $342.313 billion, dominated by the big four's share.
Over the past decade or so NZ's big four banks have consistently come out as among the most profitable when compared to their international counterparts across a range of measures including net interest margins and return on equity. They've also been generous dividend payers to their Aussie parents, and have strong regulatory capital in comparison to international peers.
Business banking excluded, BGF bubbling away
Announcing the market study to the media on Tuesday, Finance Minister Grant Robertson appeared a defensive when asked why business banking was excluded from the market study.
"If we included every aspect of banking it would be a five year ordeal," Robertson said.
The Government has been trying to stitch together a shareholding partnership with the major banks in a Business Growth Fund (BGF) that would make equity investments in small and medium sized businesses. Modelled on a BGF their Australian parents already participate in, the major banks are yet to publicly commit to this.
"We have been working with retail banks around the details of the Fund, including when it may be implemented. That work continues and has not yet concluded," a spokesman for Robertson says.
Meanwhile, Webb said draft open banking legislation was set to be revealed this week.
Politicking
There's certainly a whiff of politicking around the market study. It could have come any time over the past couple of years and a preliminary issues paper will be released in August, not too far away from October's election. That said the opposition National Party's call earlier this year for a quicker but shallower Select Committee inquiry had the scent of running interference about it from the major party that's typically closer to the big banks.
And of course through Kiwibank, which the Government moved to direct ownership of last year, the Government does have a dog in the fight. There'll certainly be those watching carefully to see how that potential conflict of interest is managed.
The elephant
So what's the elephant in the room I noted in my introductory paragraph above? It's NZ's over priced housing market. Admittedly I'm going off on a tangent here and never expected this issue to be addressed by a Commerce Commission market study into retail banking. But humour me, it's one of my hobby horses.
Despite house prices giving back much of the insane 2020-2021 surge to a peak in November 2021, the national house price to income multiple is still running at 7.2 times, with Auckland at 8.8 times. A median multiple of 3.0 times has been regarded as a good marker for housing affordability.
Banks' regulatory capital requirements are set by their prudential regulator the Reserve Bank, which adds its own spin to the international Basel capital rules. These encourage banks to lend on housing over other forms of lending and, of course, won't be touched by the Commerce Commission probe. They've also been more favourable to the big four banks than their smaller, NZ owned competitors, something that will improve as new capital requirements are phased in by 2028.
The record low interest rate environment of 2020 and 2021 saw the value of new mortgages run at an annual rate of about $100 billion as banks shoveled money out the door. Banks grew housing lending as a percentage of their total lending. For example ANZ NZ, the country's biggest bank, now has 71% if its lending exposure to the housing market up from 63% in 2019.
Aside from regulatory capital settings, there are other factors as to why banks love housing so much, as discussed in our Of Interest podcast with Victoria University's Martien Lubberink last year.
Having our major banks with such a large exposure to a single asset class comes with financial stability risks, of course, and doesn't encourage growth in productive and sustainable businesses that create jobs and support communities. Nor arguably in the construction of a large volume of actual affordable housing.
Changing this wouldn't be easy, and would require the political, regulatory and voter will that NZ appears to lack. Certainly a Commerce Commission market study won't do it.
Will the market study see mortgage rates fall plus savings and deposit rates rise? Will it see bank fees reduce and/or become more transparent? Will credit card interest rates fall? Will it see stronger competition from minnows and new entrants emerge? Will more customers start moving between banks? And will a range of innovative products and services sweep through NZ banking?
The big four banks are good at obfuscation, delaying change and partnering with threats to their business. So in terms of the market study providing clear benefits for retail banking customers, the proof will be in the pudding.
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27 Comments
The reason people can't switch banks has nothing to do with switching a few direct debits to a new bank account and everything to do with credit restrictions such as CCCFA, temporary LVR restrictions, the new financial advice regime, onerous AML processes and most significantly the massive volatility in interest rates and incoherent tax policy which means people's borrowing power is shot.
If you can't qualify for new lending because the government is constantly changing the rules you are a prisoner to your existing lender and have no refinance options. That is entirely on the government which has an entire council of regulators with five separate government departments for one industry.
There is some hope out there for Kiwi consumers but it won't come from this banking review, it will come when Andrew Bayly is Commerce Minister and dismantles the existing regulatory regime.
I must admit that trying to "shop around" with anything finance/bank related is just a nightmare these days.
Endless screeds of paperwork just so I can prove I'm not part of some organised financial crime enterprise (protip to the authorities - you can find them driving around on loud motorbikes, hanging out of utes with their silly red or blue flags, doing burnouts and peddling sob stories to the "journalists" - I use the term charitably - at TVNZ)
Have a good income, relatively low expenses, want to change credit card provider but getting even a modest limit with a new provider is a hassle.
A great post dt...couldn't agree more. I started a managed fund with ANZ some time back. They lost the application paperwork (proof of identity etc.., ) twice.
Unfortunately I didn't realise that their blandishments about "making a small fortune" with them, required me to deposit a large( r) fortune for them to have a play with.
And now with term deposits, we savers make a wonderful 5-6%, less tax in an inflationary environment of 7+%. ie we are being screwed.
And now the most bloated government in our history is starting an investigation into bank profits,...the same banks they lent large sums at low rates to stimulate house lending. I would think the banks that took up this wonderful scheme, operate on the principle of robbing the drunken sailor because "if we don't someone else certainly will!"
I wonder how big mill's fortune would be if the RBNZ didn't "create" so much money over the past few years.
A bit like an employee complaining the barman is running the company's tab too high, while said employee is sipping away at a Glenfiddich 21 or Johnnie Walker Blue.
The easiest of answers is already in front of any Government that wants to embrace it - allow any New Zealand taxpayer to have a single call account with the RBNZ. Let the credit rate of interest be the same as that available to the existing banks, and linked to the OCR, and let any commercial bank that wants the ancillary business bid to get it from each retail customer according to need. Taxpayers don't have to actually get an account, just the knowledge that it's possible could be sufficient.
Or, and even better(?) scrap the OCR all together; remove the unlimited access to liquidity that the bank now have, and let them compete against each other for the funds available. The RBNZ can still play a "Lender of Last Resort" role, but don't make it as easy to access, and as cheap, as it is today.
Disintermediating banks isn't on the agenda - https://www.interest.co.nz/banking/120190/against-backdrop-possible-commerce-commission-probe-banking-competition-gareth
And what a good outcome that could be. Let's face it, we already have a quasi-CBDC, with most transactions already digital.
"We believe the introduction of CBDCs will inevitably involve households and businesses converting some of their commercial bank deposits into CBDCs. All other things being equal, this would require banks to shrink their balance sheets
Because the reverse was:
Increasing the supply of money lowered interest rates further, providing liquidity to the banking system and encouraging banks to lend, which helped drive the explosion in bank mortgage lending and house prices in 2020-2021.
Listening to the dialogue, this has nothing to do with investigating the banks. It is pretty much aimed at reassuring the public that their obscene profits rorting their customers is OK.
Our Commerce Commission are a total failure and of all the many things that need to be investigated it is the Commerce Commission. As far as I can see they largely exist to protect the interests of big business. Certainly that is all that they seem to do.
Its an election sop. Nothing more. Just like the supermarket and petrol enquiries. The best you can hope for is that nothing changes. The worst that can happen is that bank charges actually go up as a result of Govt interference - just like the electricity enquiry that resulted in low user plans being abolished, and the credit card charges enquiry that resulted in businesses being able to add surcharges to customers' bills. Every time this Govt sticks their nose in to something, consumers come out worse off. Just look at the rental market.
As I've said before, the acquisition of Postbank, Countrywide, NBNZ and Trustbank over the past 20 or so years, has done little to improve the competitive landscape. Yet the ComCom let those acquisitions sail through - why?
But here we are.
To me, the biggest problems now are depositor apathy, AML is too painful and hinders switching (the banks know this and don't make it easy) and depositors are rightly fearful about the credit quality of smaller players. i.e. it is the liability side where there is little competition.
On the last point, a government deposit guarantee and high regulatory capital would assist but ultimately, banks are also dependent on wholesale funding and credit ratings. And by virtue of size/concentration risk alone, local NZ only banks will struggle to get decent AA/A ratings and therefore cannot compete in terms of cost of funds and borrowing volume.
You would however think that major overseas banks could take a stab at this market but with their own problems since the GFC and the relative size of NZ as a target market, this obviously hasn't been a focus. Indeed, HSBC, Rabo (?) and Citi have pulled out of retail banking.
The Big 4 banks are more profitable because their competitors arent. In other words, banks charge what they can get away with, and the ceiling on charges is what the competition charges. They do not need to price below their competition to obtain customers. Because the NZ banking regulations punish smaller banks and non-banks the Govt is essentially locking in high prices. The secret to lowering banking charges is to enable their competition to be more competitive. Alas, the current situation is the complete opposite as international banks like HSBC withdraws from NZ due to it not being profitable to remain here.
Additionally, switching to smaller or non- banks is not going to happen until a Deposit Guarantee is in place. Kiwi's have long memories of the BNZ and South Canterbury Finance going under. The Big 4 are about as "safe" as its possible to be in NZ due to their size, so this entrenches their dominance.
Also, I would question if the NZ market really is offering up extreme profits. The saying "the cure for high prices is high prices" means that if high returns were available, new entrants would be coming in to the market to get their share of those profits. As above, we have the opposite. There are several more large Australian banks that do not operate in NZ - Macquarie being the main one, but Bendigo Bank, Virgin Money, and the Bank of Queensland would also be contenders. Why have they not expanded here?
Macquarie is most definitely a retail bank. I had my mortgage with them. They are accessible to anyone with decent credit. They are roughly the same size as Westpac and ANZ now
https://www.afr.com/companies/financial-services/why-the-big-four-banks…
According to the latest figures from the Australian Prudential Regulation Authority (APRA), Macquarie Bank grew its owner-occupier home loan book by 22.6 per cent in the 12 months to January, while its investor home loan book grew by a staggering 29.6 per cent.
As a result of this spectacular growth, the Sydney-based bank is now firmly established as the country’s fifth-largest home loan lender, with a home lending portfolio bulging with $58.9 billion of owner-occupier loans, and $44.1 billion of investor loans.
Macquarie is causing headaches for rivals by offering extremely sharply priced loans in an attempt to lure high-quality borrowers. Rivals believe that this is part of a long-term play to expand its base of well-heeled customers, who might also be interested in other investment products the bank offers.
In response, the big four banks are being forced to cut their rates to prevent their high-quality customers from switching lenders.
As for the little banks, they may be smaller than the Big 4 but they are also much larger than our small banks here in NZ. Bendigo made $488M in profits last year, compared to TSB's $53M. Adding a layer of "medium" banks may be what is required to provide some competition.
Fair point, are the profits extreme? I.e. if with a magic wand we broke up the 4 Australian banks into 10 smaller separate subsidiaries, there probably would still be a similar aggregate profit dollar amount across these 10 entities.
I think the real issue is where the profits are going. If you think $5b per year goes to Australian banks, what about all the other multi-national corporates that operate here (which didn't 20 years ago)? An estimate I read once, which I cannot cite, is that total is $20b per year going off shore.
As an ex Commercial banker I started a finance company 23 years ago – taking business off banks is very easy and margins are healthy. Borrowing and repaying money is a critical part of our economy – so banks play a vital role. When they are inefficient, deliver poor service yet remain very profitable then yes there should be investigation as to why
The writer apologised for the introduction of over priced real estate into this article – no apology needed. This is a key part of the matrix. All banks now employ credit scoring models. Bank analysts today have few skills to assess credit and no discretions – and really they are not needed. All banks really want to know is how much equity you have in your real estate – which in turn provides an approval or decline. Save some tinkering around income, there is not a lot more too it than this. As long as kiwis continue to over invest in real estate which props up unsustainable property values giving banks this buffer this problem will persist.
A question for election year - does anyone have the political courage to direct kiwi investment away from real estate into productive investment?
'Examining barriers to new competitors entering or expanding in the market'
No need to have a commission for this. The barriers are capital, technology and expertise.
The first two can be solved easily by a massive capitalisation of Kiwibank to bring its scale up to a level of good competition to the Big 4. Expertise can be sourced by attractive terms of employment and offering the challenge to build up the Kiwibank. And Kiwibank can gain market share by offering better terms to customers by way of interest, fees, etc, subsidised by Government backing. Where there is a will, there is a way. Having obtained full ownership of Kiwibank the Government should decide what it wants to do and where it wants Kiwibank to go. And decide within the next few months. Not few years.
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