I never paid much attention to my bank’s financial performance. Until it dropped.
TSB’s latest financial result is a bit of a stinker, and I can’t say I saw it coming. But I should have.
Let's rewind to June 2022. Then, the now-outgoing CEO Donna Cooper was heralding TSB’s great leap forward, with the little Taranaki-bank-that-could, “hitting its stride” and an improved profit performance of a little more than $38 million after tax after “12 months” and “brave decisions”.
Cooper said the bank’s focus and investment in the past three years, and last 12 months in particular, "was required to set the bank up for the future". Cooper said the bank had dealt with a major compliance uplift, significant systems and technology upgrades, COVID-19, and considerable regulatory developments. It spent $136m on those upgrades.
“We’ve had a massive amount of work to do, but now we’re ready to springboard into a new era of profitable growth and innovation,” said Cooper.
TSB’s charm is in its small bank, can-get-someone-on-the-phone, realness. Our bank manager for many years was named Joy, we could call her. Yeah TSB doesn’t have particularly exciting products, but the service is great. Yeah it doesn't have many branches and they're quickly diminishing to almost none, but what do you need them for, nowadays, anyway?
This was all fine. But I can’t help but feel that perhaps there is a comfort in being with a big bank, with their big profits, big balance sheets, diversified risks (operating in NZ and Australia), and listed company status which means a swift flow of information such as when a bank has a problem, or, its been party to a hack.
TSB hasn’t been covering itself in glory lately. It feels from the very outside like a bank under pressure. In December, I was one of its customers who were the subject of a third-party hack, with my phone number, name and account number at risk. The bank sent one email, on December 16. I can't say I remember reading it; that was my last day in the office for the year.
The bank also swapped its cards from Visa to Mastercard in 2022, which did not go off without a hitch, and led to automatic payments bouncing across many months, and phone calls and emails to sort out bills including with my health insurance provider. It took me weeks to work out what was going wrong. There was not a word from TSB about the issue.
Even Cooper’s exit has been strangely handled to an observer; someone in Stuff’s Taranaki newsroom seems to have got wind she was out and a story was published on a Friday with no fanfare and seemingly no sense of obligation from TSB to, you know, tell everyone about it? TSB then pumped out a press release on Tuesday the following week.
This kind of behaviour would never fly if it was a listed company. Like the big banks.
It is no secret TSB, and New Zealand's small banks and even the big four, have been struggling or working hard (pick whichever description best describes your bank) to keep up with regulatory changes and rising cost imposts, as the industry is fond of saying.
The Credit Contracts and Consumer Finance Act (CCFA), and rolling maul of tweaks to it, has been a financial burden for smaller banks in particular.
Massey University banking commentator Professor David Tripe says smaller banks are less able to keep up with the regulatory burden; they have fewer customers to spread these increased costs across, and less money available to upgrade technology, let alone innovate or offer new products and services.
TSB’s latest result is more evidence of the regulatory burden it is clearly struggling with.
In 2023 net profit after tax fell 48% with expenses more than blowing out. Operating expenses alone increased 39%, or by more than $53m, to more than $189m.
TSB also dropped this clanger: other expenses rose to $30.483 million, up from $12.408 million the previous year. So much for that profitable, juicy future predicted 12 months ago.
The increase in other expenses was due to TSB undertaking a review of its products and services, the bank said.
“Provisions have been recognised where this review has identified areas that may result in financial loss and the costs can be reasonably estimated.”
Again, the CCCFA is fingered as a potential culprit, with TSB stating that as part of work to implement changes to the act, it reviewed processes around consumer credit products which had identified "some areas requiring attention".
It was, "working through the detail of remediating customers as required".
None of this is comfortable reading as a TSB customer.
There has been a intense focus on the enormous, stupendous profits of New Zealand’s big four banks.
But a small bank profit, eroded by 48% in one year, weak margins and a poor return on assets – how do we feel about that?
The Reserve Bank of New Zealand’s (RBNZ) bank dashboard shows TSB has the reserves to withstand tough times, as all the main NZ banks do, holding well in excess of the RBNZ minimum total capital requirements. This has been another area where the regulator has been active in banking, with RBNZ cranking up capital adequacy ratios.
Profitability sees TSB fall to the back-of-the-pack in the latest data, with a 0.1% return on its assets for the quarter ended March 31, 2023. Only the Co-operative Bank fared worse.
Bank profits, after a stonking run, are tipped to start tightening as higher interests rates slay the mortgage golden goose. Banks are now scrapping for new loans, and rumours abound of mortgage lending teams under pressure.
KPMG's most recent bank performance review found bank profits were already decreasing, falling 13% for the quarter ended March compared with December 2022, as banks start preparing for tougher times.
It faces real challenges in the mortgage market and the economic climate wont help out this time. TSB's mortgage lending accounts for 87.5% of its total lending, although board chairman Mark Darrow says lending and deposits "continue to show growth".
KPMG found new mortgage lending fell 28.3% for the March quarter compared with the December quarter. It warned that more people are struggling to pay their debts, banks including TSB will need to write off bad credit, and as more people re-fix their loans and mortgages throughout this year, more will see their finances unravel, impacting the banks' finances too.
Darrow says TSB has a strong capital and liquidity position, considerably in excess of the RBNZ regulatory requirements, and a credit rating of A- with a stable outlook from international ratings agency Fitch, "the highest rating for a regional bank in New Zealand".
Compare its assets, and TSB is just small. It has about $9.1 billion total assets compared with NZ’s largest bank ANZ’s outsized $188.9b, or Rabobank at $15.4b or Government-owned Kiwibank at about $33b.
Liquidity, here TSB does well, with plenty of stable funding underpinning its finances.
But the next graph on the central bank dashboard is less rosy again. This one shows TSB’s lending is more concentrated across fewer customers than three-out-of-the-four big banks, at 54%. The higher this number is, the more concentrated the lending.
ANZ also reported another gigantic profit this year in New Zealand, even though it fell as it is already starting to write off debts.
In terms of profitability it's a beast too, returning a full 1% on its assets for the March quarter, with two of the other big four - BNZ and ASB - returning 1.2%.
TSB is also the minnow in terms of performance for its owner the Toi Foundation, left in the shadow of its other investment; Fisher Funds. The Toi Foundation's 2022 accounts show Fisher contributed $56.1m in income while TSB was responsible for a $12.5m payout.
This year it will be $10m, Darrow says, and "the expectation and intent is that dividends will continue to flow as normal".
Attempts to talk to TSB about banking are difficult; at a time when there is a banking competition study, and intense focus on banking competition where you would think the bank had something to say, if not a story to tell about how it is a strong competitor in the market, it has been all but silent. It is often lethargic in dealing with media enquiries.
Perhaps there is merit in what I presume is a head down, bum’s up trying-to-bloody-deal with the CCCFA approach.
When you start to look at TSB a bit more closely, it does feel a bit, well, provincial. There are no former prime ministers on this board. TSB appears to have second-tier lending experience more than anything else.
The fact also is that what the banks, commentators, and industry reps like the Banking Association have been saying about regulatory impost on the industry is true. It's hard out there for a small bank. TSB is feeling it, and paying for it.
What's worrying is the lack of front-footing and talking to the market, and its customers, about what is really going on. Cooper said in June last year TSB had paid out more than $130m in its three-year fix-it plan and was ready to move on.
Was this just wishful thinking? What has happened since then to change the bank's outlook? Why can't it seem to get a handle on the CCCFA?
Cooper's pending departure emerged the day after the bank's annual result announcement. She's scheduled to leave on July 28, and we're being told she'll be spending more time with her young family before seeking her next challenge.
From a customer perspective, I haven’t had an overtly awful experience with the bank. I don't not like it. We've noticed the dropping service. Joy was moved onto something else and most of our banking just happens, and we don't need a lot of attention.
However, I am not sure TSB really has a particularly compelling offer, or story, in the market anymore. We took up a credit card offer somewhere else last year. TSB had nothing to tell us, at all, when we were shopping around.
Those regulatory changes and costs aren't going to abate. The new bank conduct regime, prompted by Australia's Royal Commission into the big four which spurred our conduct and culture review, has spawned legislation. And TSB will now need to demonstrate it can also meet those new fairness conduct obligations.
If I was weighing up my bank, against this backdrop of economic turmoil, and ongoing costs and rising headwinds, I might want a bank with a beefy balance sheet, thanks.
I am not saying I am moving bank, of course. Have you seen what you need to show to get a mortgage with the new CCCFA regs?
TSB, of course, says its customers have nothing to worry about. Darrow says customers can be assured TSB is in a sound financial position, and customer satisfaction remains very high.
Its board was also very strong, he says, undergoing a significant refresh with two new appointments in 2022, (with a new board chair and deputy chair appointed), and a further three new appointments in 2023.
Yet, I can't help but feel maybe a big four bank has merits. I would love TSB to show me differently.
37 Comments
TSB, Heartland, SBS........ as a depositor/investor (not thinking so much about where your mortgage might be) you have to ask yourself how much exposure to them you want/need against the backdrop of a developing mortgage debt bloodbath that has months to run (when OBR is still in place). I would suggest not a lot.......
TSB are now a difficult size, the cost of compliance and cyber security has increased a lot in the last 3 years. The economy of scale is not great for TSB in this regard. The computer systems and apps of the big banks are noticeably better, ANZ is the leader in this space. Probably easier to be small or big right now. TSB needs to look for a buyout of merger I believe, Kiwibank being the obvious fit. A good article.
The TSB board should have been receiving many monthly reports on the KPI's that they wish to gauge the performance of products, services and people within TSB. Whay have they not identified issues before the Annual Report, the board should have the expertise. It looks to me that Donna Cooper is the scapegoat for board negligence.
Being the subject of a scam is no good, the writer has my sympathies. TSB’s profits are distributed to the NZ community and not overseas shareholders - for this reason alone (let alone the fact they regularly win bank customer satisfaction awards) I continue to bank with them. While I understand most of Rebecca’s concerns, I suspect TSB have a slightly different focus and can take a short-term loss of profit on the chin.
Yup. TSB's big competitive advantage is that it is not run by a bunch of foreign thieves, whose only job is to extract money from Kiwis and send it overseas. They should apologize for their botchups, but hammer that advantage in the same sentence. As if any foreign bank is better run. Every foreign bank I have had the misfortune to deal with over the last 20-30 years have been run by a bunch of greedy dysfunctional idiots. My present Kiwi banks aren't flash, but are no worse than those others.
Kiwis love to bash the big banks. Have we recently had the bank failures of the United States? No, because our large banks are well capitalized--and pay a lot of tax. But here in NZ, it is the same old tall poppy syndrome. Anything or anybody that is successful has no right to success.
What do they offer?
ASB and Kiwibank have pushed up some of their fixed-term home loan rates, in some instances more than appears justified by rising funding costs.
NZ's banks are only moderate profitable. Because of the lack of competition, our banks look as if they make large profits. But it's more volume than it is margin. As has been said in the past, NZ banks' ROI is in the middle relative to other publicly listed companies in NZ. No comments about the companies at the top quietly enjoying much higher margins than our banks do.
What, like adding more costs to the top line of the smaller banks? A Deposit Guarantee won't be free, every bank customer will pay for it. And for what?
Let's take TSB as an example, as it's what this article is about, and say "It's failed". What next? In steps the RBNZ/Government and calls a meeting with ANZ, BNZ, Westpac and ASB and asks them "Who wants to pick up the pieces and incorporate them into their organisation? And how can we lessen the cost of doing that for you?" The next day OBR kicks in, to tide the customer over, and then they get a new name on their statement saying "TSB. Part of (the ANZ Banking Group)" and TSB becomes just another name in the history of NZ banking, akin to NBNZ etc.
No bank in NZ will fail so utterly that bank deposits are at risk. If that happened, can you imagine what the cost of funds to the country would be? Double the current costs, and then double them again. Risk of bank failure needs a Deposit Guarantee when there are +4,000 banks in a marketplace. Not when they are a handful, all interdependent on each other for the countries benefit.
The counterpoint to this is why would I put funds in a small NZ bank if they are not secured, when I have so many other choices either overseas or even via kiwi bonds. Hell, even the Australian arms of our very own banks have deposit guarantees, so why should we be different?
A deposit guarantee scheme would give confidence, and attract more deposits, which I think was really the underlying tone of the article.
The profits (after the c-suite has pulled some rediculous salaries) go to the shareholders. The shareholders are scattered worldwide, everybody that's invested in a decent international equity fund will have a small piece of the action, including almost all kiwisaver plans.
And further to that, if profits are excessive, then buy more shares. The truth is, our bank ratios line them up as sound but not stellar investments. They make good profit, because they are good at managing risk (have sufficiently high lending standards predominantly), and because they are hood at technology, can spread costs over large scale. Everything i question about the second tier. I'm fearful that deposit insurance reduces lending discipline.
I just want to point out to that if a company is listed on the sharemarket it doesn't mean it's 100% owned by investors in said sharemarket. Company founders can elicit to float 10% or 20% of their shares and keep the rest for themselves
Disclaimer: don't know what the situation is for our Big Four Aussie parents
Generally small banks tend to do better in the expansion phase of the economic cycle. They can typically scale up faster and move on emerging opportunities because they have less organisational inertia.
In TSBs case specifically that bank was carried by its service levels, it's staff where exceptionally good. Moving to digital banking was always going to be tough for TSB because they had to destroy their main competitive advantage.
I bank with TSB and they are a great bank. Been with them for 20 years. Previously with BNZ and would not go back to them.
Someone else has commented about board oversight. I agree that is where the main problem is. CEO may have been a bit keen on spending but the board should be monitoring that. Time for a new chair!!!
I am not sure that deposit insurance is that required. We will be paying for it anyway!!
I agree MS. I've been with TSB for 30 years and am very satisfied. The ability to phone, get a human response and solve any issues has been first class. I bank with Heartland, also a tick, and with ANZ, being a shareholder as well, but their performance has been abysmal. They seem to excel at giving their customers the impression that they are just a b--- nuisance!
However, all banks have experienced a wild ride with IT, not to mention having to pay for, and put up with the bureaucratic nonsense that only a government agency, the FMA, can impose.The smaller banks probably have less ability to tell government to f off.
I will continue with TSB even though they have been struggling to maintain customer support as well as cope with all the recent change. I think their lack of questioning shareholders, their lack of commercial focus from the Board, and maybe a poor choice of rigour in their senior executives, all three factors linked, has dragged on their traditional sound performance.
And out there, internationally there are thousands of increasingly sophisticated thieves, to test the abilities of all our banks in these small isles. I think we are very vulnerable.
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