Commerce Commission asks for public feedback on banks’ high profits

The Commerce Commission Te Komihana Tauhokohoko has released its terms of reference for the market study into competition in the personal banking sector, which had “persistently high profitability” compared to banks overseas.

Home loans and term deposits will be a particular focus of the study ordered by Commerce and Consumer Affairs Minister Duncan Webb in June after he concluded there were “indications of possible competition problems” with banking, a sector in which the major banks have recorded a run of record profits.

Webb ordered the market study after mounting cries of protest over high bank profits, including from the founder of 2degrees Tex Edwards, who decried the roughly $2000 profit the banking sector was making on every New Zealander.

The commission is seeking public feedback on a preliminary issues paper, released on Thursday.

The market study was the first opportunity in New Zealand’s history to evaluate in-depth whether competition in personal banking was promoting outcomes that benefited consumers over the long term, the commission said.

“Profitability in a market appears high does not provide conclusive evidence that the market could be more competitive, and it is important to seek out the underlying reasons for apparently high profits,” the paper said.

Commerce Commission chairperson John Small said the commission’s initial review of existing research shows that banks were more profitable than in comparable countries over the past decade, “and this raises questions for us”.

“We want to understand whether lack of competition in personal banking is a contributing factor. This is important in the context of our study as profitability can serve as an indicator of the intensity of competition,” he said.

The commission’s preliminary issues paper noted recent and widespread media coverage of bank profitability, especially that of the largest four banks; ANZ, ASB, Bank of New Zealand and Westpac.

All those banks are Australian owned, and the issues paper noted: “The Australian Productivity Commission’s 2018 report identified that the four major Australian banks as a group held substantial market power in Australia as a result of their size, strong brands and geographic reach.

“As a result, the major Australian banks had the ability to pass on costs and set prices that maintain high levels of profitability without losing market share.”

Analysis by the Reserve Bank Te Pūtea Matua showed large banks here delivered higher returns on equity for shareholders than large banks overseas.

“The Reserve Bank noted that ‘the large New Zealand banks have been more profitable than the rest of the New Zealand banking sector and large banks in a number of comparable economies in recent years’,” the issues paper said.

The Treasury concluded banks had not, however, made supernormal windfall profits during the Covid pandemic.

However, the commission said: “the Treasury’s report found also recorded its observation that the four largest New Zealand banks have had persistently elevated levels of profitability compared to the rest of the banking sector on return on equity and return on assets, and questioned why competition between the large New Zealand banks’, due to their relatively lower costs, had not resulted in lower interest rate margins and fees.”

The study will not, however, probe competition in small business banking, a sector which some think is less competitive, and less transparent, than personal banking.

“Personal banking is where we have got the least problems,” former bank economist Cameron Bagrie, owner and director of Bagrie Economics, told Stuff in June.

“Business banking is where we have got the most problems, and where we have the biggest opportunity to fix things,” Bagrie said, who was chief economist at ANZ for more than a decade.

The public has until September 7 to make submissions on the preliminary issues paper.

The final report on its findings must be published by August 20 next year.