Government ruling out 60% of profits, he says
The scope of the market study on competition in the New Zealand banking sector has been labelled by one economist as “nuts”.
Independent economist Cameron Bagrie (pictured above), of Bagrie Economics, told NZ Adviser that as the scope of the study was limited to personal banking, this accounted for around 40% of bank profits.
By omitting business banking, Bagrie told NZ Adviser that the government had ruled out over half of banks’ total profits.
“I think it’s nuts that [the government] limited it to personal banking,” Bagrie said.
“I can’t see why you’d rule out 60% of profits and keep it pretty narrow.”
On June 20, the government announced an investigation into competition in the banking sector, focusing on personal banking services. The Commerce Commission will undertake a market study to examine barriers to new competitors, products and services and the ability to switch banks.
Bagrie said that mortgages accounted for the lion’s share of bank profits on the personal banking side, noting that competition in this space was already fairly strong.
“There’s four big banks, Kiwibank and a whole lot of minnows…it is pretty easy to shop around,” he said.
The mortgage adviser community were ready to help customers, and the process to open an account at another bank is fairly straightforward for consumers, he said.
Business Banking omission a concern
If the government wanted to make a real difference to the banking landscape in New Zealand, Bagrie said that business banking was the place to look.
In the business banking side, there was far less transparency over pricing, less competitive pressure, and, from a practical viewpoint, it was generally a lot harder to switch banks, he said.
Balance between pricing and taking of risk deemed important
As banks price for risk, it is important to strike a balance between how much risk banks take on, versus how much they’re pricing for, Bagrie said.
“When you dig down in regard to what’s behind that business loan, there appears to be a lot of security,” Bagrie said. “If something goes pear-shaped, very seldom do banks lose a lot of money.”
Credit intermediation is a critical part of economic development – and the pricing and taking of risk is a big part of that, Bagrie said.
Discussing the areas that the market study could review, Bagrie suggested it could look at access to the payment system and credit card charges, and also how quickly interest rate rises were passed on to depositors.
“Banks made a lot of money on the ‘liability’ side of their balance sheet (e.g. savings accounts, term deposits),” Bagrie said.
Interest rates on these types of products were “incredibly low” during the period of low interest rates and were slow to move up as interest rates increased, he said.
“Bank margins have expanded and I expect a lot of that margin expansion has come from the liability side of the balance sheet as opposed to the asset side.”
While competition within the banking sector is important, Bagrie said that for Kiwis to understand their options and get the best deal, financial literacy is a key requirement.
He noted that 50% of credit card accounts were interest-bearing, which although marked an improvement, highlighted the need for financial literacy among users.
“You want to see a more competitive banking sector - one way to do it is to improve the financial literacy of the population,” Bagrie said.
Bank profitability has come under scrutiny in recent times, Simplicity managing director Sam Stubbs saying earlier this year that he would like to see a proper Commerce Commission inquiry.
Banks need to be profitable, as they’re big enterprises, but what needs more attention is the balance between risk and return, Bagrie said.
Should business banking be included in the government banking probe – and would you like to see more of a balance between risk and return for business lending? Share your thoughts in the comments section below.