Opinion: 5 reasons to thank our Aussie owned banks and 5 reasons to spank them

By Bernard Hickey The Listener magazine published a front page article this week titled: "Bankers! How Aussie banks are squeezing Kiwis." As is often the case, the headline was much stronger and controversial than the article underneath, which was more balanced and useful. We've also seen an upsurge of grumpiness around rising mortgage rates in the last 48 hours after Reserve Bank Governor Alan Bollard said he was concerned about higher wholesale rates (although he did not specifically attack the banks). One business lobby group accused the banks of price gouging and Federated Farmers accused them of misleading farmers in this article here. But in the spirit of catchy headlines and a bit of pop analysis of our current banking system, here's my thoughts on the issue. 5 reasons to thank our Aussie-owned banks 1. Our Australian-owned banks (ASB, ANZ National, BNZ, Westpac) are strong, profitable and well regulated. They currently have tier one capital ratios at around 8%, which is double the minimum required. That's because they are backed by large and equally well regulated Australian banks, who are themselves backed by the fantastic A$1 trillion Australian pension system. The big four banks are now in the world's top 20 banks by market capitalisation and are among the handful of banks globally with credit ratings that are AA or better. 2. The Aussie-owned tag implies they're all run from Sydney and Melbourne, which is simply not true. They are Australian owned, but they have their own boards, their own balance sheets and are regulated hard by our Reserve Bank of New Zealand. Almost all the big lending and product decisions that matter are taken in Auckland and Wellington, with the bulk of lending decisions taken in the branches by New Zealand managers. 3. Our banks didn't do the stupid things that have crippled the UK and US banking systems. They didn't run investment banks that leveraged themselves to the eyeballs with toxic debt. They didn't pay themselves ludicrous bonuses that distorted their risk taking decisions. New Zealand's banks, even more so than their Australian parents and certainly more so than the UK and US banks, stuck to their knitting of simple mortgage and overdraft lending to homeowners and businesses. The banks, largely, didn't get into the fraught area of mezzanine (debt and equity) development loans to apartment and resort developments in the same way that finance companies did and hallelujah for that. 4. Our banks are easy to do business with. Anyone who has had a bank account in Australia or Britain will know how much better our banks are. They actually do better in customer satisfaction surveys than their Australian bank parents. Here's the latest Roy Morgan survey on bank customer satisfaction. In a recent survey by Kiwihost/JRA (page 8) banks were rated as having better customer service than any other industry in New Zealand, with telcos rating as the worst. 5. Our banks are competitive and are still lending. Sometimes it takes a while and the introduction of Kiwibank has helped, but there's no denying our banks are much more competitive than other infrastructure industries with only a few large participants. I'm thinking here of the power and telecommunications businesses in particular. Our banks have fought like dogs to win term deposit in recent months and are now working out they have to offer high rates to win the money. They have fought like dogs in the past to offer very low mortgage rates, often at the expense of profits. Our banks are also still growing lending. Bank lending rose NZ$332 million in the month of February alone and is up NZ$7.28 billion from August last year, just before the crisis began. That means Aussie bank shareholders have stumped up at least another NZ$582 million of extra capital to back that lending. It is the untold story of the banking crisis. Most of that will be profits that have not been paid back to the parent as dividends, but it is still a substantial amount of equity injected into New Zealand in the last 6 months, perhaps more than for any other sector. To give readers and business borrowers an idea of how much US and UK banks have deleveraged, US bank syndicated loan deals have dropped to US$80 billion in the March quarter from US$450 billion in the September quarter of 2007. 5 reasons to spank our banks 1. They are not offering enough interest rate relief to businesses, particularly medium to large ones. The Reserve Bank has rightly been pushing the banks to pass on as much interest rate relief as possible to businesses, which are the largest employers in the New Zealand. Banks have been concerned about higher risks for businesses, given business income is more volatile and their security is less certain than for wage and salary earning homeowners. But this caution could easily turn into a self-fulfilling prophecy given the cash flow pressure businesses are under right now. A single measure of business lending rates is difficult to find, but the Reserve Bank's measure of base rates show the banks have cut them by just 130 basis points to 12.6% over the time the Reserve Bank cut the OCR by 525 basis points to 3.0%. 2. They are lending too much and too fast to farmers. Farm lending growth is still running at over 20% on an annualised basis, despite the slump in dairy prices and the likely bursting of a bubble in land prices. When are the banks going to take the keys to the bank utes off the farm lending teams? 3. They borrowed too much overseas on short terms. The banks have broken their own rules about matching the maturities of their lending and deposits when they chose to obtain about 40% of their funds on wholesale markets, mostly on 30-90 day terms. They were borrowing short (and overseas) and lending long (and locally) in a big way. The Reserve Bank, the IMF, the World Bank and the ratings agencies have all warned this makes New Zealand vulnerable in a global financial crisis if credit markets freeze for any length of time. There is debate about how short the foreign borrowing is, but it's more than it should be and getting bigger by the day as banks have been slow to go out and use their wholesale government guarantee to borrow for longer terms. 4. They pumped up the housing bubble with too much high LVR (Loan to Value Ratio) lending. Our banks were not immune from the collective insanity that drove New Zealand's housing market (and the economy) up through the roof from 2003 to 2007. They competed against each other hard with loans worth 90% to 100% of the value of the property and cut rates to the bone. Right near the end some banks were offering 100% plus loans. The bank lending to property investors armed with tax avoiding LAQCs (Loss Attributing Qualifying Companies) was not as aggressive as from some finance companies and mortgage trusts, but it wasn't far off. 5. They cut their term deposit rates too fast and too far. Banks were used to getting cheap funding overseas whenever interest rates dropped here. They could substitute funding from Mums and Dads in New Zealand with funding from banks and other institutions overseas. They appeared to think they could do the same again this time around, but found that Mums and Dads jumped into corporate bonds, guaranteed finance companies and others as soon as the term deposit rates dropped below 5%. The banks are now revisiting that by offering 5% plus rates for longer terms, but it took a while.