Thumbs up to the government announcing a Commerce Commission investigation into banking. Thumbs down to the scope.
Bank profitability has received attention for years. Little wonder when you look at average profit growth of 17% per year. Fuel companies, supermarkets, construction have all had a turn, being looked at by the Commerce Commission, albeit with limited major change. Banking was logically the next cab off the rank.
The inquiry covers personal banking alone.
A quick look under the hood reveals:
• ANZ’s pre-tax profit in the 2022 year was $3.2 billion, with personal banking accounting for $1.4bn (44%). Removing fund management income drops this to around 40%.
• ASB reported pre-tax profit of $2bn with retail banking $853 million (42%).
• Westpac consumer banking and wealth division accounted for approximately 44% of profits.
• ANZ’s business banking segment reported a cost-to-income ratio of 21%. That is eye-wateringly low and implies a huge return on investment.
• BNZ’s segment results didn’t separate out business banking from retail, which combined were 62% of profits. National Australia Bank does separate out personal from business and private banking and the former is just over one half of the latter. Using that as a proxy suggests BNZ’s retail segment would be south of 40% of profits and likely closer to 30%.
So, across the big four, personal banking is around 40% of profits – and 60% of profits looks to be excluded from the study.
The rationale for focusing on personal banking alone was put to me as three-fold by the commerce and consumer affairs minister’s office. Personal banking was considered an area where “we know New Zealanders are feeling the impact of whether or not there is a competitive sector every day”. Second, a personal banking market study will take 14 months and “if we were to include every aspect of banking, it would be a far longer endeavour”. The focus on personal banking services “will see the greatest gain for the largest number of people in the long term”.
Any inquiry is welcome, but why exclude most of banks’ profits? Outside of personal banking there is less ability to switch, less competition, the most difficulties accessing finance, and customers’ feedback is poor for business banking with net promoter scores negative across all the four major banks.
Retail banking has numerous bank minnows chipping at the big banks, despite the big four dominating. Not in the business banking world. Many of the minnows have pulled back from business lending and focused on personal banking alone.
Borrowers are feeling the impact of higher interest rates because we have an inflation problem. Inflation is brutal and creates real pain. Household are hurting; just talk to any provider of social services.
But for some reason, we also seem to gloss over the impact of inflation on businesses or farmers. Consumer price inflation peaked at 7.3%. Producer price inflation (inputs) peaked at 9.7%. Farm cost inflation is double-digit.
If you want some evidence of who inflation is hitting, look at the tax numbers: they show corporate tax revenue for April 2023 standing at 32.6% below April 2022. Inflation is savaging profitability. Job losses are to follow.
Fourteen months to completion is the expected timeline, with a team of 10 people. Readers can be their own judge of that.
The final rationale – that a focus on personal banking services “will see the greatest gain for the largest number of people in the long term” – is the most peculiar.
Lifting productivity is where we will deliver the greatest gain to the largest number of people over time.
The financial sector plays a key role in determining the strength of any economy by supporting the emergence and growth of productive firms. Housing needs an economic base but home lending in New Zealand has gone from 50% of all lending to 63%.
The OECD had a complete section on the role of the financial sector in their 2021 Economic Survey of Australia. It noted that “empirical research suggests that productivity benefits of financial deepening are realised via business lending, rather than household lending”.
The OECD listed a whole lot of challenges with businesses accessing credit – including a lack of competitive pressure and too much focus on housing – that you could rinse and repeat for NZ.
Lending in Australia and NZ is highly skewed towards households. Banks’ preference for security, and especially real estate, constrains businesses without such security. Banks price for risk (margins, return on equity, profits) but do not take a lot. The credit and economic cycle will lower bank profits via rising provisioning over the coming year but watch three years out and what they claw back via their highly securitised positioning.
Directing the Commerce Commission to focus on personal banking was classic politics and fails to appreciate or understand where the competitive landscape across banking has the most problems or offers the most potential for improvement.