[ad_1]
Banks are the next organisations in the Commerce Commission’s spotlight – and it has already indicated that they appear to be making big profits.
The competition watchdog has released its preliminary report in its market study, seeking feedback.
As part of that, it made several early observations about the state of competition in New Zealand’s banking sector.
Here are five things it noted.
New Zealand banks are making big profits compared to other countries’ banks
The report said New Zealand banks were widely regarded as financially strong and stable, “but indications of persistently high profitability raise questions about the intensity of competition, including for personal banking services”.
The commissions aid it was not clear to it why the returns on equity – a measure of profitability – appeared to be above those of other participants in the New Zealand banking sector.,
It pointed to Reserve Bank data which sowed that the big banks had a five-year average return on equity that was more than twice that of the smaller banks. It was also above all peer countries apart from Canada. It quoted the central bank: “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 commission said the Reserve Bank did not find that earnings were more volatile here, which could have been an explanation for needing higher profits.
Adobe Stock
Bank profits, banking sector, financial, Stuff generic
Treasury said profits weren’t ‘supernormal’ – because they kept happening
The commission also pointed to a recent report from Treasury, which responded to a Finance Minister request for advice to what extent the banking sector was generating “windfall” profits, and the tax options that might be available to respond to that.
Treasury said windfall profits would be defined as temporary excess profit that arise from an extraordinary external event (rather than an ongoing structural issue like weak competition) that the business was not responsible for.
The Treasury’s report noted how in September 2022 nominal bank profits in New Zealand were the highest on record, with an upward trend over the past three decades, but when measured by return on equity and return on assets profitability was near the average for the 2013 to 2022 period.
The Treasury’s report also recorded its observation that the four largest New Zealand banks 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.
Switching banks isn’t easy
The commission noted that it seemed that bank switching activity was relatively limited. This could be a barrier to expansion for new players, it said.
The extent to which services were bundled, and perceived difficulties in the technical procedure for switching were also barriers, it said.
When customers find it hard to change to a competitor, it reduces the impact of competition.
Some people don’t have access to banks
The report noted that access to personal banking could be affected by things like the proximity of a branch or a person’s digital literacy.
Many banks have closed branches in recent years. “Lack of access to personal banking services may financially disenfranchise individuals and impede their economic mobility, as well as their ability to build wealth and generally live a secure life.”
There’s limited innovation
The commission will look at any potential hurdles to innovation in banking – including the relatively slow adaptation of open banking capability.
The final report is due on August 2024.
[ad_2]