By Gareth Vaughan
Rising interest income and new international regulations that appear set to reinforce the market dominance of our major banks could lead to New Zealand politicians following in Australian footsteps and moving to shake-up the banking sector, PricewaterhouseCoopers (PwC) says.
The accounting firm's latest bi-annual Banking Perspectives report titled Banks return to normal, but not as we know it covers the financial results of ANZ, ASB, BNZ, Kiwibank and Westpac for the second-half of their 2010 financial years.
The report, out today, notes that the five banks' net interest income rose by NZ$300 million, or 9%, from the first half-year to NZ$3.3 billion. PwC says this is "impressive" considering the limited growth in the banks' lending books with loans to customers up by just 0.7%, or NZ$2 billion. This interest income rise represents an average 8 basis points increase in the major banks' reported net interest margin from the first-half of 2010.
And PwC points out the net interest margin increase for our major banks is higher than that experienced by the Australian banks, including ANZ, ASB, BNZ and Westpac's parents, who reported a 5 basis points lift from the first-half of 2010. That said, PwC says the New Zealand banks' absolute net interest margin is still below that of their Australian counterparts.
Net interest margins rose as interest income climbed 4%, double the 2% increase in interest expense, meaning the banks have increased the interest they've earned on loans above the increase seen on their funding interest costs.
PwC partner Sam Shuttleworth told interest.co.nz in a video interview that, prior to the half-year covered in PwC's latest report, net interest margins had been decreasing for 18 months. And PwC suggests the strong rise is unlikely to continue as the repricing of lending ends and the upward pressure on the cost of wholesale funding continues to flow through, eating into bank results.
"The question is how aggressive will the major banks be to protect their interest margins with the fear of starting bank regulation discussions, like those seen in Australia?"
A round of bank criticism, primarily over mortgage rates, by Australian politicians, media and consumers, culminated in Treasurer Wayne Swan announcing a major reform package in December that was aimed at reducing pressure on mortgage rates. In New Zealand an instant response came from bank workers' union Finsec, which said the Government here should follow suit.
The big four banks - ANZ (including the National Bank), ASB, BNZ, and Westpac - held NZ$306 billion, or 92%, of New Zealand's total NZ$332.8 billion worth of banking assets as at September 30 last year.
Meanwhile, PwC also points out new global banking regulation due to be introduced between 2013 and 2019, known as Basel III, will require local banks to undertake additional process and systems changes. In anticipation of these, the major banks have been building up their capital reserves. See page 16 and 17 of PwC's report for details of the Basel III requirements.
PwC says this additional regulation of banks will increase the barriers to enter the market for potential competitors, therefore protecting the major banks' market power.
"This provides an additional angle to the political discussions occurring in Australia and increases the likelihood of them repeating in this country."
Shuttleworth says, however, that PwC expects pressure to return to net interest margins due to high offshore funding costs.
"They (funding costs) are likely to get higher when you take into consideration the global demand for wholesale funding," Shuttleworth says. "With Basel III coming along, all the banks are going to be competing in this area."
10 Comments
Hopefully Julia Gillard becomes the Aussie answer to Ron Paul. The future starts at the top of the corrupt system with the central banking cartel;
Kate , I have always been concerned when I get an invitation from a commercial Bank to a lunch with Dr Bollard.
While I would never question his integrity, Dr Bollard should avoid these sessions and use professional bodies such as NZICA , the Law Society or CSNZ for these sessions rather than the people over whom he has an oversight role, sponsoring the lunch .
Intersting that the aussie banks hold 92% of our assets and are working as a monolopy to get as much money out of New Zealand as possible. As I have said before we need to take charge of our country and swap to the New zealand banks like Kiwibank. The sooner the better.
Tranny, it interesting that most Banks appear to be making signifigant investments in property (their branches and premises with BNZ and Kiwibank all doing up their branches in my town and ASB opening a new branch) and IT systems (like internet banking etc) which have to be funded, like most businesses, out of profits.
I think you would be surprises how little of the profits are sent offshore. Yes they are making profits but to blindly say they are a cartal bleeding every $$$ across the ditch it too simplistic. It was the strength of the Aussie Banks that got us through the funding issues of the GFC.
"It was the strength of the Aussie Banks that got us through the funding issues of the GFC."
LOL, Sorry THAT is BS! and here's why:
The Aussie banks along with the RBNZ played a decisive role in building the property bubble and fuelling positive NZD exchange rates to encourage foreign funding for the NZ banks. They purposely dismissed all current account deficit warnings, all exporters and their opinions, and all local cash savers. They purposely helped fuel the NZ debt bubble just to aid the Aussie banks.
The property bubble was blatantly obvious very early on from about 2003 and it was also blatantly apparent to anyone with even half an economically sound brain that it would end in disaster if not dealt with quickly and smartly via a decent few OCR increases. I myself wrote to Bollard (2003) telling him of the problems he would face IF he did not do something NOW! He acted years too late as we all know.
I and many others were ignored and hence you now all face what we have now. A absolute global financial crisis that will have on going effects for maybe decades.
Some people just can't be told anything because their own perceived 'education' makes them so full of themselves.
Bollard and the clowns at the RBNZ with all their fancy economic degree's are such people.
All those degree's really didn't count for much did they? Same with Greenspan, Bernanke and Geithner all of whom have been PROVEN to be either utterly corrupt or utterly devoid of any real economic understanding. Textbooks can only teach you so much. Having a real sense and intuition of reality is worth so much more than any BS degree.
I don't disagree with you as to the origions of the property bubble (cheap offshore funding, high net immigration, compedition between banks for market share etc which all unlikely to be repeated again at the same time) but the Banks in NZ (most Aussie owned) having been well managed and structured (from a balance sheet and profit perspective) got us through the GFC (even if it be argued they were one part of the cause).
I don't have a degree, just what I have learnt at the coal face of the finance industry over 25 years observing and talking to real people from all works of life.
Well, You know then that the Aussie banks borrow money mainly from Asia (HSBC) etc. This is why they only 'appear' solvent and sound. Truth is they are owners to a great deal of debt. Debt that is being supported by our own governments via the RBNZ and ARB via the OCR manipulation in THEIR favour to keep the NZ and Australian housing bubbles from really popping in one massive explosion.
Let's call it NZ and Aussie's very own "too big too fail" policy
The reality is they can only do this for so long before the shit hits the fan regardless. They are now providing false 'inflation' figures to pretend they have it under control but anyone can see the REAL cost of living is going up FASTER month by month. The CPI's are not really reflecting this due to the usual 'cherry picking" of data. The eventual OCR increase just keeps getting put further back ( now Oct they claim).
The WHOLE system is a crock!
Yes Banks borrow wholesale money from a range of sources but the RBNZ has done one thing (some could say too late) with the introduction of the core liquidity ratio which has forced banks to fight over retail deposits. The mortgage war of the 2000's has been replaced with the deposit war of the 2010's.
The OCR has some impact but not sole impact on the price of money (interest rates).
Certainily the swing to floating rates will enable the ORC to have a more immediate effect as compared to when 90% of home loans were fixed and all the ORC did was effect exchange rate and business interest rates (as these tended to have more market sensitive pricing structures).
I think its too simplist to believe that the CEO of the banks can ring up Mr Bollard and they have a direct effect on the ORC.
Banks work on a interest margin so get the same "profit" whether rates are high or low.I suspect they would prefer a stable interest rate enviroment as it is the accelerated movement in rates up which creates servicing issues for clients and accelerated downward interest rates which can cause an excessive demand for credit. Stable rates (interest as well as FX) enables businesses to plan and invest with more certainty which flows into employment, increased tax take etc.
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