In its preliminary issues report, the commission outlines the study core; deposit and overdraft account services, personal loans, and mortgage and credit card lending rather than KiwiSaver, wealth management, insurance, and foreign exchange.
The paper does not pre-suppose there are competition issues in the sector.
At its core, the commission says, banking involves taking deposits from lenders and extending loans to borrowers. Retail deposits and home loans are typically a bank’s largest sources of funding and lending. The commission will also consider other products to build a complete picture of competition between personal banking service providers.
The study will take 14 months to assess whether there is enough competition in the sector and whether bank prices and profits have been “too high for too long” because of market inefficiency.
Other matters to be considered are industry structure and the nature of competition; entry conditions for potential competitors and expansion; barriers to consumer comparison of bank offers or switching banks, including the extent to which products or services may be tied or bundled; impediments to new products or services; and comparative indicators of bank financial performance (including profitability).
The 27 registered banks will be the main focus. The four largest banks – by total assets - ANZ, BNZ, ASB, and Westpac hold 88% of total assets of registered banks in New Zealand.
Home loans
One of its biggest areas of investigation will be home loans and interest rates which have significant effects on household budgets. About 86% of home loans are provided by the four biggest banks and about $348 billion in lending is on mortgages.
“We propose to focus on home loans because there is some anecdotal evidence suggesting potential for consumer stickiness and inertia, corresponding to subdued levels of switching,” the commission says.
For 23% of households with home loans, repayments are significant. Overseas studies have identified home loans as being particularly profitable portfolios for banks. Home loan borrowing costs are likely to flow through to rent for non-homeowners.
The commission expects that focusing on home loans will help identify and better understand factors potentially affecting competition. Its initial understanding is competition for home loan customers is a central arena for retail banking competition more generally, and has an important role in attracting and retaining personal banking customers.
“We are also aware that mortgage brokers play an important role in matching home loan providers with consumers, and we intend to study the role they play and the impact they may have on competition,” the commission says.
Deposits and lending
Another focus is the dynamic between interest rates charged for lending and those paid for deposits. Deposits accounted for about 62% of registered banks’ total funding.
The combined total deposits of all registered banks is $435 billion - $128 billion in transaction accounts, $110 billion in savings accounts and $197 billion in term deposits.
Net interest income, the difference between a bank’s interest income from lending and interest expenses paid to funding sources, is the primary component of banks’ earnings.
The commission is also interested in how banks balance their portfolios across retail deposits and lending. It will look at how they set interest rates, as well as other terms and conditions.
“For banks to undertake their core business of credit intermediation, they need to match their lending with various types of funding, including retail deposits, funding from wholesale lending markets, and equity from their shareholders. The relative balance may be impacted by cyclical market factors such as consumer interest rates and housing, and therefore home loan demand,” the commission says.
Profitability
Bank profitability will also come under the microscope. A June Cabinet paper says the profit returns of the big four banks in the past five years were above several international peers.
It says profitability is an outcome of competitive markets, and can provide insight to the intensity of competition, although high profitability is not conclusive evidence that the market could be more competitive, and it is important to seek out underlying reasons for apparently high profits.
Publicly available data about bank profitability indicates that the sector appears to have persistently high profitability compared to international peers and the four largest New Zealand banks appear to persistently derive higher returns on equity than the rest of the local banking sector.
However, recent Treasury analysis noted nominal bank profits in New Zealand in September last year 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.
It observed the four largest banks have had persistently elevated levels of profitability compared to the rest of the sector on return on equity and return on assets and questioned why competition between the large banks, due to their relatively lower costs, had not resulted in lower interest rate margins and fees.
But, it says the fall and recovery of the main banks’ return on equity and return on assets between 2020 and 2022 were consistent with international peers. It concluded there was no clear evidence bank profitability constituted a windfall and did not recommend a windfall tax in the banking sector.
Submissions are now open and will close on 7 September.
