Banks have been quick to increase their mortgage lending rates, but slow to pass on higher interest to gran-and-grandad savers praying for better returns from their term deposits. Jonathan Milne reports.
Retirees with nothing but a few small term deposits to top up their superannuations are watching the cost of living run away from them.
The slow increase in term deposit interest rates doesn't come close to keeping up with the rising prices of tomatoes, lettuces and potatoes, says Pete Matcham, the vice president of Grey Power NZ. "The need for fresh vegetables within the diet is quite key to maintaining health in older people."
He worries that with the arrival this week of autumn, elderly people will also be forced to cut costs on heating their homes. "If they do without food, or they don't heat their homes, they are putting themselves at severe health risk," he says. "But it's also creating a potential much greater burden on society, because they then become in need of more and more advanced medical intervention."
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Matcham was responding to the Reserve Bank's criticism of the banks that it regulates, for hiking mortgage interest rates faster than they increase term deposit rates. For some products, there is now a big and increasing gap between what the bank will take in interest payments, and what it will pay you for the use of your savings.
This is worrying Reserve Bank Governor Adrian Orr and chief economist Paul Conway, because just as higher mortgage interest acts as a stick to stop people spending, so attractive term deposit rates can be a carrot to persuade people to put away their credit cards.
Conway tells Newsroom: "I think the banking sector would be an appropriate focus for a market study, should the Government wish to go there."
"I am particularly interested in improving markets where the greatest long term gains can be made for ordinary New Zealanders." – Dr Duncan Webb, Commerce Minister
Market studies are a new tool that the Government has directed the Commerce Commission to use three times: to investigate petrol prices, supermarkets and currently, building supplies. "I really like that the Commerce Commission now has the power to do market studies," Conway says. "That gives them the ability to look at any industry."
This is not the first call for a probe into bank profitability. In November, then Prime Minister Jacinda Ardern said bank profits were unjustifiable. She was responding to Westpac's announcement of a 2022 after-tax profit of $1.16 billion, an increase of 12 percent on the previous year, and ANZ's $2.3 billion, up 20 percent. "I think questions need to be asked to managers of these banks as to whether or not they are serving their communities well," she said.
On the other side of the Tasman, Australian Prime Minister Anthony Albanese this week called on the country’s big banks (many the parent companies to New Zealand's biggest banks) to boost deposit rates for savers, amid concerns rate hikes were only being passed on in full for borrowers.
NZ banks' net interest margins
Dr David Tripe, professor of banking at Massey University, says the interest spread (the difference between the cost of funds on interest-bearing liabilities and the return on interest-bearing assets) has widened substantially, from a low of 1.58 percent in the June 2020 quarter, to 1.95 percent in the September 2022 quarter.
But this is the first time the Reserve Bank, which is statutorily tasked with regulating banks, has stepped in so explicitly. It's been warning of "profiteering" in some sectors during the cost of living crisis and in the aftermath of Cyclone Gabrielle, and singled out the widening gap between mortgage and term deposit rates.
"It's a very legitimate thing for the central bank to be concerned about and to be keeping an eye on," Conway says. "It's a general warning across the New Zealand economy that now is not the time for profiteering. Now is actually the time to start paying the price, for climate change and, in this instance, for the cyclone."
Commerce Minister Dr Duncan Webb says no decisions have yet been made about the focus of the next market study. "However, I am focused on using the tool to ensure markets operate fairly for consumers," he tells Newsroom. "I am particularly interested in improving markets where the greatest long term gains can be made for ordinary New Zealanders."
"The interest spread has widened substantially, from a low of 1.58 percent in the June 2020 quarter to 1.95 percent in the September 2022 quarter, and this has had a significant impact in the level of profit for the four big banks." – Professor David Tripe, Massey University
Market studies can be initiated by the minister, or by the Commerce Commission – but the commission is funded to undertake only one study at a time.
Dr John Small, the commission chair, acknowledges a range of views on what the next market study should or could be. "We appreciate those insights and the interest that people are showing in the market study tool," he says. "We welcome information from people on the markets they think we should or could undertake a study into."
Since the appointment of Dr Webb as minister, last month, the commission has been working with officials at the Ministry of Business and Innovation to consider the next market study. No decisions had yet been made about a topic.
Dr Small noted that many businesses should have benefited from new regulation that came into effect on November 13, 2022, that lowered a significant component of bank costs – namely, merchant service fees on credit cards.
"With a reduction in costs, payment providers will be able to lower their fees for the vast majority of businesses in New Zealand – and particularly small and medium-sized retailers who rely on card-based transactions," he says.
"We would encourage businesses to ask their payment providers about whether they are on the best deal, or alternatively shop around for a better deal with other payment providers."
Quarterly bank profits before tax
Heartland Bank, which is just 10 years old and has fewer assets and smaller revenues than the Big Four banks, is nonetheless the bank with the biggest net interest margin. It uses that as a selling point to its investors, as Heartland is the only registered bank listed on the NZX.
Its interest margins are followed by Rabobank, and then ASB. The net interest margin is how much the bank makes from its interest-bearing assets like home loans, and is a standard indicator of how effectively a bank uses its funding to generate revenue. Banks also earn revenue from other sources like fees.
There are some products where the discrepancy is stark. For instance, this week Kiwibank will charge 7.69 percent to lock in a mortgage loan for 3-5 years – but it will pay only 5.25 percent interest on a three, four or five year term deposit of more than $10,000.
But Kiwibank spokesperson Jamie-Lee Bracken says it's leading the market across the major banks, with a one-year term deposit rate of 5.40 percent and one-year fixed lending rate of 6.49 percent. "We regularly review our interest rates to ensure that both our lending customers and savings are competitive in the market so our customers are getting a fair deal."
In addition to guides on how to navigate rising rates, she says the bank proactively reaches out to customers who its staff think may need some support.
At ANZ, external communications head Briar McCormack says New Zealand has a very competitive banking sector with 15 locally incorporated banks. The bank continuously reviews its deposit rates to ensure it provides a balanced approach to managing interest margins and the pricing of its products.
"Over the last 12 months we have increased our Serious Saver rate eight times, the most recent being on Wednesday March 1. This is one of the most competitive rates in the market to support customers to meet their savings and investment goals. Those looking for a higher interest rate can also look at our term deposits, with our 12-month rate currently sitting at 5.30 percent pa."
"Our profit needs to be viewed in the context of our size. ANZ’s capital is around half of the NZX top 10 companies combined, so we are large, and that is reflected in the size of our profits ... We’re very conscious of our social licence to operate and we’re in a strong position to meet the housing, business and trading needs of the country." – Briar McCormack, ANZ
Since October 6 last year, she notes the Reserve Bank's official cash rate has increased by 4.50 percent. In response, ANZ has sought to take "a balanced approach" to both its lending and saving interest rate movements, with changes in each area very similar.
"Banks get their funds to lend to New Zealanders from a variety of domestic and international sources, and local deposits are just one. Depending on demand for lending and funding pricing, sometimes we need local deposits more than overseas sources and vice versa," she explains. "Our profit needs to be viewed in the context of our size. ANZ’s capital is around half of the NZX top 10 companies combined, so we are large, and that is reflected in the size of our profits. However, our level of profitability is roughly on par with them.
How mortgages and term deposit rates compare
"The usual way to measure the profitability of companies is to look at the return on the equity they use. For the financial year ending September 2022, the return on equity for ANZ NZ was ~13 percent, and that compared to an average return of ~12 percent for NZX Top 10 companies.
"While our profit was higher in 2022, we are also carrying extra capital. Our returns are still lower than what they were in 2019."
McCormack says ANZ has been in New Zealand in one form or another since 1840 and works hard to maintain the trust of its customers and the communities it operates in. "We don’t take that trust for granted," she says. "We’re very conscious of our social licence to operate and we’re in a strong position to meet the housing, business and trading needs of the country and are critical in creating an economy robust enough to withstand shocks and crises."
"If banks’ overall interest margins were to shrink, the smaller banks could be in some trouble, as their costs are significantly higher." – Prof David Tripe
At Westpac NZ, which has the lowest net interest margin of the big banks, spokesperson Will Hine says the bank's team works hard to offer competitive banking products to New Zealanders across both lending and deposits.
"Our net interest margin for the year ended 30 September 2022 was unchanged from the previous year at 2.00 percent," Hine says.
"Looking at two popular fixed term products, our one-year term deposit has increased 4.50 percent over the past 24 months to 5.30 percent today, while our one-year special fixed home loan has risen 4.30 percent over the same period to 6.59 percent today."
BNZ asked for more time to prepare responses. ASB did not reply to questions.
Professor David Tripe says the interest spread has widened dramatically to 1.95 percent. "This has had a significant impact in the level of profit for the four big banks in particular."
He says some of the difference derives from product mix – because it you just look at individual products and the relative costs, the margins are not outrageous. For example, ANZ’s one-year fixed rate loan is at 6.54 percent and they are paying 5.3 percent for a one-year term deposit.
"The problem is that there are some deposit products for which the interest rates have not moved up as much, and people have also been making less use of high interest term deposits than in earlier periods," he says.
"Another point to consider is that, if banks’ overall interest margins were to shrink, the smaller banks could be in some trouble, as their costs are significantly higher – and they have increased, quite possibly as a results of increased regulatory costs from the Reserve Bank.
"I would greatly worry that in an election year, a minister could be tempted to send the Commerce Commission off on more populist tilts against the banks... to help divert attention from the prior government failures that led to rising rates." – Dr Eric Crampton, NZ Initiative
"It’s a pity we can’t examine the interest spreads at individual bank level, as the Reserve Bank suppressed this information at the last review of the disclosure regime. This makes it difficult to properly analyse what is going on."
Dr Eric Crampton, chief economist at the NZ Initiative think tank, says the appropriate use of a market study would be to ascertain what barriers there are to new entrants to this country's banking market.
New Zealand has been a slow follower on structural changes like open banking, and such easy wins as account number portability. When phone number portability was introduced in this country's cellphone market, it played a critical role in breaking apart the Telecom-Clear duopoly.
It's expected bank account portability would make it easier for bank customers to move their money (or their debt) to more a competitive bank.
What all this means is it can be difficult for a new player to get a toehold in banking here, Crampton says. "In groceries, the Commerce Commission found zoning and consenting proved substantial barriers preventing entry. In building materials, the commission’s draft study pointed to substantial barriers to using foreign-sourced building materials. In both cases, easing barriers to entry would improve competition," Crampton says.
"If the Commerce Minister told the commission to look at barriers to entry in banking, or in insurance, that could be worthwhile. The combination of barriers to entry and regulatory measures like the Credit Contracts and Consumer Finance Act may have had substantial detrimental effects on competition.
"If so, it would be great to document the barriers, their effects, and how those barriers could be eased. Is New Zealand seeing the same innovations in FinTech and InsuranceTech as are being seen overseas? Could a foreign online financial service provider easily enter the New Zealand market, or would it be impossibly hard given our scale? What are the effects on consumers?
"But I would greatly worry that, in an election year, a minister could be tempted to send the commission off on more populist tilts against the banks," he says. "Sending the commission off to interrogate the banks about interest rates and mortgage rates would be politically tempting and help divert attention from the prior government failures that led to rising rates. I would also hope that the commission would push back against proposed studies that would shed a lot more political heat than provide actual light."
