"A fantastic outcome" for New Zealand would be if there were about six other kiwi companies making more money than the country's big four banks, BNZ CEO Dan Huggins says.
Huggins made these comments during a panel discussion at the INFINZ (Institute of Finance Professionals New Zealand Inc) Conference 2024 in Auckland on Tuesday. Alongside him on the panel were; ANZ NZ CEO Antonia Watson, ASB CEO Vittoria Shortt and Westpac NZ CEO Catherine McGrath.
His comment came in response to a question from the audience asking why banks continue to report record profits, whilst access to capital remains constrained.
"We have got a significant amount of capital deployed in New Zealand, and I'm sure everyone in this room has heard this before, but that capital has been growing over time. That's a good thing, both because it's improving the stability of the sector, but also is indicative of the fact that capital has been made available to New Zealand and people have been using that capital to grow businesses or buy homes," Huggins said.
"But as you grow that capital, it's going to mean that the profitability of the industry is going to go up to pay for that capital. I think that is often seen as a really bad thing of, hey, the profits are going up. But as long as it's linked to continued growth and credit availability and supporting New Zealand businesses, I actually think it is a good thing."
"We obviously need to make sure that it's a reasonable return on that capital...we've all had those conversations recently, and I think we all argue it is quite reasonable, the return that's being generated from that capital," said Huggins.
In the final report from its recent market study into personal banking services, the Commerce Commission said the NZ banking sector's profitability is high relative to banking sectors in peer nations.
"Between 2010 and 2021, New Zealand’s banking sector profitability has, on average, performed in the upper quartile relative to peer nations on three important measures: Return on equity, return on assets and net interest margin," the Commerce Commission said.
Other points the Commission made were; "Additional cross-checks produce consistent results and provide us with a higher degree of confidence in this finding...New Zealand’s major banks have consistently achieved higher average returns on equity than other New Zealand banks...[And] the focus of New Zealand banks on lower-risk activities should see lower profits."
'It's in our interest to lend money to people who can pay it back at the right price'
Watson said she'd like to understand what access to capital remains constrained.
"Because it's always in our interest to lend money to people who can pay it back at the right price," said Watson.
She went on to say one of the things that's a challenge when discussing big NZ banks' profits, is NZ's a small economy and the banks are very big within this economy.
"So you're actually talking about $200 billion worth of assets for our [ANZ NZ's] $2 billion profit, for example. But $2 billion, I don't deny that that's a really large number in a New Zealand context. [But] I wish the conversation would turn to how can we grow other New Zealand companies to be this kind of scale? We do happen to have the biggest scale in New Zealand of [any] entities," said Watson.
Huggins responded, saying; "A fantastic outcome would be that there are half a dozen other kiwi companies that are making a whole lot more than the banks are making on a nominal basis. And then the argument goes away. But that's just not the reality in our economy, unfortunately."
'The human toll of having too much debt is a challenge'
Earlier Shortt responded by highlighting recent economic challenges, including cost of living and inflationary impacts.
"If you have a look at a couple of critical ratios, in my mind, we've got less debt-to-income in New Zealand than we had at the time of the GFC [Global Financial Crisis] and I think that's healthy. I don't think that's about banks constraining people," said Shortt.
"I actually think that you've got to really understand what levels of debt are appropriate because we've got so much more volatility now in the world. So sure, just lend left, right and centre. But I actually think the human toll of having too much debt is a challenge."
"It's something that we've got to really keep our eye on. So I actually think that my observation about the health our customers are in, the level of resilience, is because we're not loaded up to the hilt with debt. I don't see that's about capital constraint. I just think this is about responsible lending," Shortt said.
McGrath noted the banks have "had a good shot at trying to tell the story" about their profits, "and it may not be landing on the most open ears."
"I guess the way that I would look at it is when we look at the NZX 50, and say, what's the return? That tends to be the average return for the top 50 biggest companies in New Zealand. And then where do you put return on tangible equity for each of the banks? We're about mid-point," said McGrath.
"And so, irrespective of that being said by a number of us in different ways over a long period of time, I think that says...we're at about the same level of return as any big company in New Zealand. And I don't know that there's a huge amount more that we can say about that."
The four bank bosses were initially asked about three topics, open banking, infrastructure and social licence, before being asked some questions from the audience. One of the topics the audience raised was financial literacy.
"[In] the study that I saw in the UK to do with financial literacy, and it was a big longitudinal, 30 to 40 year study, the only thing that was an indicator of whether or not you were going to be good at managing your money was what your parents taught you. What you earned, how educated you were, whether you had a postgrad [degree], none of that mattered," McGrath said.
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4 Comments
If NZ registered banks have around $550bn of liabilities (our deposits) and they are required to have around $60bn of equity to back those liabilities, then bank profits are effectively set within a narrow range. If the return on equity was similar to other countries - say 10% - then profits would need to be $6n per year after tax (10% x $60bn). If the return on equity is a bit on the uncompetitive greedy side - say 13% - then profits after tax need to be $7.8bn. Obviously the latter applies to NZ.
Two obvious ways to reduce the regressive drain of money from our economy to wealthy bank equity holers:
- Reduce private debt (swap it for Govt debt)
- Govt put up half of the equity via a deposit insurance scheme of some sort.
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