Wed, 04 May 2011 11:55a.m.
By Michael Wilson
Banks are bastards! That’s a common cry from our Australian cousins as the Big Four financial institutions continue to rack up huge profits. In New Zealand we are more polite … we quietly question the parental heritage of these large foreign corporations.
But are they bastards? Do they make excessive profits?
The first way to answer this question is to say it’s a relief they do make a profit. So many banks made such bad decisions pre Global Financial Crisis (GFC) that they now no longer exist, or are supported by their respective governments. Just look at Ireland whose banks have made massive losses and only continue to trade because the Irish government considers them too big to fail.
The Big Four Aussie banks - ANZ, Westpac, Commonwealth and NAB - did not get involved in the big sub-prime mess and were reasonably conservative in their lending practices.
So for that we should be thankful as if they had made disastrous decisions both the Australian and New Zealand governments would be under even greater financial pressure than they are now. And for businesses and individuals it would be a lot harder to get a loan thus putting a bigger brake on our economic growth prospects.
The fact they are making profits is also a reflection that the Australian and New Zealand economies are doing reasonably well. Australia, thanks to the commodities boom is doing particularly well. In New Zealand, it’s not so bright, but thanks to our “soft” commodities – dairy, meat, wool and timber - prospects are positive if we can just get over the short term pain caused by the Christchurch earthquake.
So, in this environment, the banks are in good heart and that’s a positive thing.
But are they making too much profit?
I would answer this by saying …. “Maybe a little, but it’s our own fault.”
What I mean by that is we have allowed our banking sector to be dominated by four foreign-owned banks. The Auusie banks control at least 90 percent of our market. One huge negative for New Zealand is that much of the banks’ combined profits – $2.5-3.0 billion dollars a year – heads back across the ditch. It is a huge drain on our economy.
But it was our decision (or the Government’s) to sell the BNZ, Postbank, ASB, The Trust banks, Countrywide and United Building Societies – to name some of previously locally owned financial institutions. The Australians are far more nationalistic when it comes to economics and finance. They have what is called the Four Pillars policy which effectively makes it impossible for any of their Big Four banks to be taken over. I think the average Aussie would think it madness to allow their financial sector to be almost completely controlled by offshore interests.
Besides a heap of cash flowing offshore, the other downside of our allowing our institutions to be bought by overseas interests is it lessens the amount of competition. There are some local banks such as Kiwibank, TSB and the proposed Heartland bank. They are relatively small and so do not, yet, have a huge impact on the competitive environment. But imagine if relative heavyweights such as Postbank or Trustbank were still active participants in the market then the competitive environment might just be a little bit keener.
Something we can do to make things more competitive is to think about switching banks.. The locally owned banks often do offer a good deal on mortgages or deposits and if large numbers switched allegiance then the Big Four would have to up their game. Unfortunately, most of us think it’s too much of a hassle to switch banks. Kiwibank is having some impact and most analysts would agree its presence has added a bit more competition to the local market.
The Big Four will always maintain that they are not profiteers as their return on assets is not exceptionally high. And little different to overseas markets. Mind you, they will always say that, even when announcing big profit rises.
In summary, be thankful they are profitable, for the alternative is much worse. And if you do want to see more competition and lower fees, shop around and don’t be afraid to switch banks. If you make a threat to move to one of those little local banks you might just find the Big Four will suddenly become a little more accommodating.