"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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17 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.
I like that option.
I often wonder what the pollies thought the outcome would be when they deregulated the banks? Considering they are all private business's which have significant impacts and influence into all areas of the economy, such thinking had to have been extremely shallow and rooted in fantasy rather than reality.
OMG!!!!...no thank you.
I'm old enough to remember when almost everything was run by da gubbermint.
Airlines, banks, power, radio & TV, Post Office, POSB, water, buses, railways......tens of thousands of civil servants feeding at the trough.
I remember about 1971 making a collect call from Fiji, where I lived, to Auckland, and getting a very severe telling off from the operator after complaining about the length of time it was taking. Jobs for life.
It took months to get anything done. No more socialism!!!!!!!
Give me a break! in 1971 the technology did not exist to deliver those services efficiently. There is literally no reasonable comparison.
The principles sitting behind most organisations, especially government ones are radically different today than they were. Technology and knowledge are much more accessible meaning that it should all be able to be done better, easier and cheaper today. BUT we have to be able to trust the pollies to deliver the structure to do it.
We all know how colossally inefficient government and local govt. departments are. I've been dealing recently with the Auckland Council to get a building permit.
It took 6 months....I only got it approved when I got on the phone and exploded and threatened the useless civil servant involved with a personal phone call to the Mayor of Auckland. It was approved in 24 hours. The council person involved imposed several modifications to my house that my builder described as farcical, the man obviously had no idea. When the shit hit the fan, all the modifications imposed by this dictatorial, imperious, civil servant were immediately revoked, and we reverted to the original plans
This gross inefficiency cost me thousands of dollars, and we've got posters here telling me new house prices are going to come down. Yeah, right!!
That's a local council not central government.
But the parallel would be the bureaucrats, who don't seem to be there to deliver a service, but rather rigidly and mindlessly apply every rule and nuance, and then put their own stance on the process.
As to the council charges, go back and ask them how much time was wasted on imposing those ridiculous mods and responding to you when it wasn't at all necessary and deduct that cost from the charges. All councils seem to have that problem. I've had my own. Getting stroppy when you have facts to back you up works well, but what seems to get lost is the wastage when the bureaucrats make stupid screw ups.
You just blew any credibility you had out the window with this "There's more than enough socialism in NZ as it is."
Please explain why you think a government owned bank is socialist? Or any business for that matter.
Frankly i don't think you even understand the meaning of the word, to have applied it here.
Jfoe,
I doubt if we could afford to buy them and you would surely not suggest that we could do it without compensation?
A better idea in my view would be to adopt what the American economist Irving Fisher suggested during the Great Depression in his paper 100% Money. His proposal was to require that any deposit that could be withdrawn or used to make a payment on demand be backed by sovereign money and that banks which offered such deposits be permitted to do no other business. All the other business banks do would enjoy no sovereign support or special sovereign supervision. This idea was taken up by economists at the University of Chicago and became known as the Chicago Plan.
This explanation comes from Felix Martin's wonderful book, Money.
I was there, listening & cringing. If the MC had the fortitude to ask the hard questions the audience actually posed: "Social Licence: how much profit is enough given the context of the cosy oligopoly?", we may have shifted these PR drones out of their comfort zone, but let's face it, these guys are just stooges with negative credibility hiding behind their oft repeated ROE & ROI defences. They will be regulated effectively, even if it'll take a while.
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