Why banks are more profitable in NZ than Aussie – is the RBNZ to blame?

Banks say the Reserve Bank’s (RBNZ) requirement for them to hold a lot of capital is bumping up one of their measures of profitability.

ANZ New Zealand chief executive Antonia Watson has defended the fact
the bank continues to report a higher net interest margin (NIM) than its Australian parent, saying this is partially because the RBNZ’s capital rules are more stringent than those of the Australian regulator.

Watson mentioned the capital rules in various media interviews earlier this month when asked if the differing NIMs suggested Kiwis were being fleeced – charged too much interest on debt relative to what they’re paid for savings.

ANZ New Zealand reported a NIM of 2.56 per cent in the half year to March, while ANZ Australia Retail and Commercial had NIMs of 1.94 and 2.60 per cent respectively.

Other Australian-owned banks also pointed to the rules when the Herald asked them to explain why their New Zealand businesses were more profitable.

Nonetheless, Grant Spencer – a former RBNZ deputy governor, head of financial stability, and acting governor until 2018 – said the impact of the capital rules on banks’ NIMs shouldn’t be overstated.

He ran some numbers that suggested the requirement for New Zealand banks to hold more capital than their Australian parents only had a very small impact on their NIMs.

He attributed the difference to the Australian market being more competitive.

ComCom puts capital rules in the spotlight

Watson’s mention of capital coincided with the Commerce Commission pointing to the rules as a factor impeding competition among banks in New Zealand.

The competition watchdog, in an interim report released in March on a study it’s doing on the banking sector, said the rules created an uneven playing field between the big and small banks.

The commission largely put the onus on the RBNZ to improve competition by changing the way it regulates banks (to ensure the financial system is stable).

One of the last times capital featured so heavily in the mainstream media was pre-Covid when the banks railed against the RBNZ for setting the rules at such a conservative level.

The details

Watson explained the reason the rules create a differential between banks’ NIMs in New Zealand and Australia is they force New Zealand banks to get more funding from their shareholders.

Because banks pay shareholders dividends, not interest, the cost of this funding isn’t captured in the NIM.

Rather, it’s reflected in other measures of profitability, like return on equity and assets, which Watson suggested people focus more on.

Spencer recognised Watson’s point.

Indeed, BNZ made a similar argument, noting its capital is equivalent to about 10 per cent of its interest-earning assets, whereas its parent – National Australia Bank – holds capital equivalent to only 6 per cent of its interest-earning assets.

Nonetheless, Spencer believed this differential only had a small impact on the NIM.

According to his calculations, the New Zealand banking industry’s NIM would be 2.1 per cent, rather than 2.2 per cent, if their capital ratios were the same as the Australian banks in 2023. (Note, Spencer used “assets”, rather than “interest-earning assets” in his calculation).

This would still be above the 1.85 per cent NIM for the major Australian banks in the second half of 2023.

Some other reasons NZ banks are so profitable

A BNZ spokesperson noted BNZ also has a different composition to its Australian parent, as well as different levels and mixes of deposits, which affect NIMs.

Former Westpac treasurer Jim Reardon agreed with BNZ and ANZ.

He also noted banks had been open about the fact it’s taken Kiwis a while to put their money in high-interest earning accounts following the Covid era, when low interest rates made term deposits unattractive.

ANZ and BNZ recognised this point too.

Nonetheless, Spencer still believed the lack of competition in New Zealand was a key issue.

He saw Macquarie Bank’s expansion into retail banking in Australia as a disruptor.

While much has been made of the competition Kiwibank could spur if it were scaled up to really challenge the big four Australian-owned banks, Spencer was sceptical.

He noted Kiwibank is a less efficient version of the big four incumbents, unlike Macquarie, which has an investment bank mentality, and came to the retail market with a deliberate and targeted disruptive strategy.

The Commerce Commission will publish its final report on its market study into banking before August 20.

The RBNZ has already suggested it is unlikely to change its capital rules in response, which will be fully implemented in 2028 – more than 10 years after it started consulting on them.

Jenee Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.