Banking inquiry misses the mark

Gordon Stuart is a partner in Chaperon, which helps businesses navigate their dealings with banks. He has a lengthy career working in the banking sector.

OPINION: Round one to the New Zealand Bankers Association and banks.

The watered-down Commerce Commission inquiry into banking should have them swinging from the chandeliers.

The scope is limited to retail or personal banking.

Some sort of inquiry into banks was inevitable. We’ve seen fuel companies, supermarkets, and construction sector all come under the microscope, albeit with marginal changes. The Commerce Commission was given more money three years ago to undertake market studies. Odds are insurance could be next.

So, if an inquiry was inevitable, make sure it is not too invasive.

The major banks have won on that front.

Personal banking is where we see reasonable competitive tension and pricing transparency. Mortgage brokers clamber over refinancing opportunities. It is easy to shop around, open and change banks. Roger Beaumont, head of the Bankers Association , claims it can be done in five days.

But ask small-medium-sized businesses how easy it is to change.

The Commerce Commission is on a tight timeframe to turn around their initial response, in August.

I hope they have a rolodex of ex-bankers they are engaging with. Bank profits are like the government fiscal accounts; you need to know where to look to see all the dirty secrets. The fuel inquiry missed where all the money was being made.

There might be some minor outcomes. Credit cards, transactional banking and foreign exchange payments systems could all do with close examination. Questions need to be asked: why is HSBC exiting retail banking?

Bank profits are partly a function of financial literacy too. Don’t pay off your credit card and the interest rate at ASB (Visa Rewards) is currently 20.95%. If you want lower bank profits, raise financial literacy and the transparency of disclosure on how various base rates are set.

Icebergs are larger underwater than above

Where is the focus on the business side of banking?

The Reserve Bank’s March 2023 statistics show mortgages are 63% of lending, but 53% of interest income – business and other are 37% of lending assets, but 47% of Interest Income.

Bank’s also grossed $1.789b in fees last year (net of reported costs $1.12b ) – it is business that bears the brunt here, due to much larger transactional volumes than individuals. Think paywave, direct debits, etc.

Bank’s also make large money from transaction banking, derivatives, interest rates and foreign exchange trading. Once again, who are the larger customers, individuals or business?

We are not going to get wealthier selling more expensive houses to each other. Quality and competitive retail banking is fine, but we need to unlock the business equivalent. The process of credit intermediation (the role of financiers) is an essential component of fostering economic growth and wellbeing.

National Australia Bank’s (BNZ’s parent) latest report disclosed net promoter scores for business banking for the big four ranging from -3 to -33. Good is between +10 and +30. Customers are clearly delighted with their service!

ANZ’s Business Outlook also shows us firms’ perception over the ability to source credit has been negative since 2016. No bank “owns” the business space, or rolls off the tongue when you think of a business loan. They are all too busy clambering for the vanilla home loan.

Regulation and compliance are partly to blame. Getting banks to hold more equity has just meant a low-risk or capital weighted housing loan gets prioritised over a business loan which carries more capital requirements. Front-line business and commercial lending experts are in decline. Compliance functions/numbers on the ascent. The balance needs to be looked at.

There needs to be a focus on risk and return not just return

Bank profits have risen by 17% per year on average. You cannot look at that in isolation though, nor compare a New Zealand bank with another company listed on the NZX. You need to look at the volatility of earnings.

For most businesses – for example Fletcher Building – profits dwindle during downturns, but the banking sector has never made a loss over a 12-month period in 30 years. The dark art of provisioning is understood by few. Non-performing loans may rise temporarily, but that does not equate to an actual loss. Banks tend to get repaid over time, or are able to realise security held.

Are they taking enough risk? Alpha returns imply they are and should be compensated as such. The risk metrics say otherwise. They get high returns (price for risk) without taking much risk.

Just ask any business who has to throw in the house and personal guarantee when after a loan. Banks take as much security as possible, and often charge a sizeable margin for risk, thereby making large returns on equity.

The Bankers Association and industry point to the importance of banks making profits. That is true. But it is about balance.

If you price for risk (large profit), then you need to take a risk too. Otherwise, the process of credit intermediation holds the economy back. We are in a world where we need to take more real business risk to make real money and get the balance better. The balance is not right.

A scratch the surface Commerce Commission study looks targeted and timed for winning votes or deflecting attention.

If the government is serious about driving competition and improving credit intermediation and the role banks’ play across the economy, an inquiry into business banking should follow personal banking.