Sunday7th June 2009: Q+A’s Paul Holmes interviews BNZ CEO, Andrew Thorburn & Labour Finance Spokesman, David Cunliffe.

Points of interest:
- David Cunliffe: Australian banks ‘are rorting us’
- It’s wrong that interest rate margins and bank profits are going up (if you remove provisions for bad debts)
- Interest rate cuts are “not good enough; that is money that belongs to ordinary New Zealanders”
- Reserve Bank could audit and investigate banks if they don’t cut lending rates
- Andrew Thorburn: Profits at the “Big Four” banks are down 18% as the cost of borrowing goes up
- BNZ’s profit margin down from 2.49% to 2.23
- Mortgage rates “unlikely” to fall because pressure on deposit rates remain high
- New Zealand banking sector one of the most stable, transparent and competitive in the world

The interview and panel discussion have been transcribed below. The full length video interviews and panel discussions from this morning’s Q+A can be seen on tvnz.co.nz at,
http://tvnz.co.nz/q-and-a-news

ANDREW THORBURN & DAVID CUNLIFFE interviewed by PAUL HOLMES

PAUL Well here’s the question a lot of us are asking around the country, are the Australian owned banks gouging us while we’re bowed by the weight of the recession? Could those interest rates be much closer to the official cash rate? And the other question too perhaps, are the Australian banks making New Zealanders carry more of the burden than they are asking of their Australian customers? We have Andrew Thorburn with us, he’s Chief Executive of the BNZ, and Labour’s finance spokesman David Cunliffe. So let me ask you the question – are the banks routing us?
Are these Australian owned banks routing us?

DAVID Well, if they’d passed through the last round of Official Cash Rate cuts one would hope the answer could be no, at the moment the answer looks like yes. That’s the Reserve Bank’s view, that’s my view

PAUL And it’s Bill English’s view perhaps, and the view of quite senior people.
Are you routing us?

ANDREW Paul, I think the whole argument here is based on the Official Cash Rate and the question of whether the OCR rates have been passed through. It’s clear that the majority have – the OCR has been reduced by 5.75% since July last year, the banks have passed on about 4.5 to mortgage customers so the majority of it. But we don’t fund the bank from the OCR. The OCR’s a useful indicator, but we raise deposits from local New Zealanders, and we raise it offshore. In fact, we raise 40% of our funds offshore and the pressure on deposits is going up so we’re paying 4.25, 4.5% for deposits for New Zealanders …

PAUL …and you’ve got to get deposits of course….

ANDREW …and we’re raising it offshore at close to 6%.

PAUL Right you’re buying money, and the longer term you’re buying the money overseas the more expensive it’s going to be.

ANDREW That’s correct.

PAUL Because money is suddenly very rare.

ANDREW Well because around the world there’s a lot of uncertainty, and investors are wanting to get a higher return and we’re having to pay for that.

DAVID Couple of things wrong with the argument. First is that the percentage of offshore financing has dropped in the last three months. It peaked at around 140 billion, it’s down to around 125 going south. The second thing is that if you back out provision for voluntary bad debts from bank’s profitability in the last six months, what you find is that the interest rate margin is going up and the profitability on bank lending in New Zealand is going up. Now that doesn’t seem appropriate in a recession where ordinary New Zealanders and business are suffering. So it’s about good corporate citizenship, it’s about a fair suck of the sav for everybody, not just the banks, while other people are suffering.

PAUL It is about good corporate citizenship isn’t it. It’s about …the Reserve Bank Governor accuses you of not sharing the burden of the recession. And you’re stakeholders in the economy too, because you’re people, you’re in business, it’s to your advantage isn’t it to stimulate the economy, to ensure the economy is as stimulated as it can be. It might even mean shaving a bit off the bottom line?

ANDREW Well that’s absolutely right, but if we actually look at the facts of the banks’ results in the last six months, the banks that have reported. The large banks in New Zealand, their profits have fallen on average 18%. The margins for banks, well in the case of the Bank of New Zealand, the margins for BNZ have gone from 2.49 to 2.23, a reduction of 26 basis points…

PAUL …That’s shocking (laughs)..

ANDREW And as well, but if you look at, often there’s a focus on the profits, but before the profits, in the BNZ’s case we pay 350 million to staff, salary and wages, another 300 million to the government by way of taxes and another 200 million to other suppliers so there’s a billion dollars before we get our profit that’s washing around the economy, stimulating it in your words, Paul.

PAUL You want to reply…

DAVID BNZ’s profit on bank lending in the last 6 months apparently dropped 11 million dollars but at the same time the provision for voluntary bad debts went up 66 million, if you back out the difference in fact their profitability on bank landing in New Zealand went up 24.5%.

PAUL Yes I’ve got an interesting figure too as a matter of fact, I’m pleased you bring up these massively descending profits. The four big Australian banks made a combined profit of 1.2 billion in the last half year. That’s down from 1.4 billion that’s hardly bearing the burden of a recession is it?

ANDREW Well if you look at the…..

PAUL That’s a point 2 of a billion drop…

ANDREW …yeah well that’s over 10 percent and if you look at the average of them it’s 18 percent and our margins have gone down. And the Reserve Bank, the government in their budget, are saying the corporate profits are expected to go down 15 percent.

DAVID I’m sorry, the Reserve Bank Governor, who’s the regulator who said that’s he’s had all the information he needs to be fair from the banks, has said that margins have gone UP. That there is a failure to pass through cuts in the short term interest rates and he is very concerned. And he has further warned the banks that if they wish to enjoy the benefits of a very orthodox monetary policy, then they need to begin exhibiting better corporate citizenship. Otherwise what it will do is it will begin to call into question the value of sole reliance on the OCR itself and that’s not a path that people particularly want to go down.

PAUL How much have your margins fallen by do you reckon – what percentage?

ANDREW So our margin, BNZ, has gone down from 2.49 to 2.23 in our last audit accounts in the six months to March.

DAVID Yes, and that includes provision for bad debts which is voluntary and ahead of the market.

PAUL Alright, let me ask you another thing. Do..is there a closer gap between the OCR and your retail lending rate in Australia than there is here? Do Australian customers get a better deal?

ANDREW So, Paul, the Australian interest rates are set by the market in Australia - it’s like the UK and the US. There’s no correlation between pass throughs in Australia and pass through here. The fact here is the OCR’s fallen 5.75, banks have passed through the majority of that. And our margins have fallen and our profits have fallen.

DAVID If I can come in there, I think the answer to your question is that in Australia the banks have passed through I think all but about 25 basis points of the OCR cuts, in New Zealand there’s over a percent gap and passing through a majority of the OCR into short term interest rates is not good enough. This is frankly money that belongs to ordinary New Zealanders, and it’s also vital for the economy.

PAUL Are you saying in Australia they’re passing the reductions on but not here?

DAVID Correct.

ANDREW So this is David’s main argument - that the OCR rate is basically the cost of funds for the banks… it’s not,

DAVID ..no,no, I’ve said short term

ANDREW … we fund from local deposits, offshore deposits. Our margins are going down our profits are falling, and I think reasonable amounts given the recession.

DAVID I’m sorry, margins are not going down the facts don’t support that.

ANDREW …well they are in the published accounts. There’s no facts to support margins going up.

PAUL Let me move on to that business you mentioned before, if the banks don’t share more of the burden of the economy, if the banks don’t pass more of the advantages of the falling interest rates on to the public that they may look at a restricted environment. Is that what you’re saying?

DAVID Well those were the words of the Reserve Bank Governor who said I think in front of the finance committee last week, that if the banks want to enjoy the benefits of a very orthodox monetary policy, and it’s one that’s presided for a very long time, then they need to display that kind of good citizenship, otherwise there’s a risk they kill the golden goose…

PAUL …Or else? What can you do? What can he do?

DAVID He can start using some of the powers in the Reserve Bank Act to drill in more vigorously to the banks’ accounts. Section 93, section 96, gives him the power to drill in to require information, to appoint an investigator if he needs to, to do an audit of the bank, if he’s unsatisfied he can put the pressure on like that. He can require reserve ratios to change. If he’s worried about the stability of the system he can direct but I don’t think we’re in that worse.

PAUL Look I’m sure Mr Thorburn and his board and his managers and staff around the country, I’m sure they’re hearing people, customers say we want a better interest rate than this – you’ve got to give us better interest rates. And that’s market pressure. If they’re not responding then presumably they can’t?

DAVID Well that raises another interesting issue. If there are market pressures but the banks are all moving so closely together that none of that pressure reaches the customer, then you’ve got to ask if you’ve got a Commerce Commission issue and in fact if there’s enough real competition in the industry.

ANDREW Can I just reply – I think the New Zealand banking system has been recognised as being one of the strongest and most stable in the World along with Australia and Canada. We’ve got a very good system. An enquiry into what? We have some of the most transparent information, incredible detail about the bank’s operations, for every bank, that must be published every quarter in what’s called a general disclosure statement. It’s over a hundred pages long. There’s incredible information that’s available to people about margins, provisioning, profits, it’s completely transparent. And we have a very strong, stable banking system that’s worked. And where costs of funds is going up, profits of the banks are falling as are margins. Those are the facts.

PAUL And of course the banks, Mr Cunliffe….but the fact also is banks have an obligation to their shareholders.

DAVID They do, private business, quite right.

PAUL They’re not community centres…

DAVID Absolutely. And this is why I think is a long term view is required because those shareholders are here for today, tomorrow, next week, next year and they will, as you’ve said, benefit from a New Zealand economy that travels well through the recession.

PAUL …but as Mr Thorburn says, we have a very stable banking system.

DAVID …and that is a good thing. And if I can finish, let me agree with Mr Thorburn on two important points he’s made. Firstly, the stability and strength of the banking sector in New Zealand is a good thing and we all value that, and the finance committee has taken a completely bipartisan approach to this. But it cannot be an excuse for failing to pass on to struggling householders and businesses, cuts to short term interest rates which have clearly, in the eyes of the Reserve Bank, not been passed on. It cannot justify behaviour like that.

PAUL And you’d better respond to that…

ANDREW Well I think the facts that I’ve mentioned before are the cost of funds are rising there is deposit pressure both locally and overseas. Our margins have fallen, I’ve stated the facts around BNZ margins falling by 26 basis points, and the average bank profits have fallen 18 percent. That sounds like to me, a reasonable position, yet at the same time we have to balance, keeping the banking system strong. Which means that banks must be profitable so they can keep investing in new systems and products and we can top up capital ratios. And all those things help present a very strong and competitive banking system. This is one of the most competitive banking systems in the world – we have four million people, we’ve five large banks – and over a decade or more margins have been falling, it’s very competitive. But at the same time we preserve the balance that banks are stable and well capitalised and operating very well.

PAUL Very quickly, what would an inquiry achieve? So often a committee can do nothing but huff and puff and blow the house down but what can you do?

DAVID Such is the life of a parliamentarian Paul. But first thing is, sunlight’s always a good test and I think the banks have said, Mr Thorburn’s said, Jenny Fagg from ANZ/National has said, they would welcome the opportunity to tell their story in public and put all the facts on the table. We would welcome seeing them.

PAUL Are we going to see floating rates go down - soon?

ANDREW I think that all depends on the cost of funds, so we’re having to pay more to local depositors, we’re still having to pay quite high amounts to offshore borrowers, so pre the global financial crisis we paid about 0.2 over a base rate, now we’re paying 1.6% , we’re still paying a lot more. So I think whether mortgage rates go down depend on competition and they depend on whether the pressure on deposit rates eases and that’s unlikely.

PAUL I have to leave it there I thank you both David Cunliffe, Labour’s finance spokesman, and Andrew Thorburn, the Chief Executive of the BNZ.

PANEL ANALYSIS OF BANKS & BANKING DISCUSSION
PAUL HOLMES, THERESE ARSENEAU, DON BRASH and ANDREW LITTLE

PAUL Dr Don Brash, you’re on the board of the ANZ, you would know the ins and outs – are the banks routing us? Or simply dealing with the times as Mr Thorburn says?

DON Well I hate to agree with one of my competitors Paul, but I think he was absolutely right. There’s been a long term decline in the net interest margin in New Zealand banking since at least the early 90s – Its been continuing to go down over the last 12 months. That’s the net interest margin between the cost of funds and the rate of return on all their lending, it’s been going down steadily, and the profitability of the banking system as a whole in New Zealand has gone down as he said about 18% in the last six to 12 months. That’s partly the contraction in the net interest margin and partly bad debts.

PAUL Nevertheless, Dr Cunliffe was adamant about what he wants to see the banks do…here’s what he said.

CLIP CUNLIFFE - the stability and strength of the banking sector in New Zealand is a good thing and we all value that, and the finance committee has taken a completely bipartisan approach to this. But it cannot be an excuse for failing to pass on to struggling householders and businesses, cuts to short term interest rates which have clearly, in the eyes of the Reserve Bank, not been passed on. It cannot justify behaviour like that.

PAUL And then he went on to issue what sounded like very subtle threats. Did you see that?

ANDREW He was talking about the powers that the Governor has and the Reserve Bank Act. I think the point he’s making is quite obvious too. Irrespective of how Banks account for their profits and their lending margins, and David was talking about the fact that there seems to be a sudden lift in provision for bad debts, the truth is that the Reserve Bank governor has said in his report to Parliament that profit margins for banks have been rising, and that was confirmed in the select committee report, and although there’s some talk about those margins having come off in the last three months or so, that’s a short term blip where there’s been a long term movement upwards in profits, and I think we do need to see something better from the banks.

PAUL Profits up see – and banks are stakeholders in economies too aren’t they?

DON David’s engaged in a little cheap politics quite frankly Paul. I mean there’s no doubt at all in my mind that if the big banks, all of them, are seeing profits under pressure. No question about that. And the cost of their money – earlier this month one of the major banks was offering a mortgage loan for six months of 4.7%, at the same time they were offering 48% on six months money. Now there’s a huge pressure on those margins.

PAUL And I suppose we have a sound banking system because we don’t throw it up into the air, we don’t throw pound notes into the fire when we’re the bank manager.

THERESE I think we do have to be careful what we wish for. Of course in a time like this you don’t want to see your banks making obscene profits. That does not look good. But on the other hand I don’t think you can only look at the OCR, you also do have to look at what the deposit rate is, in terms of…you have to attach that to the discussion. And let’s not forget that part of the reason why the deposit rate went up, was because of the government’s guarantee which was free for people, for institutions under 5 billion, in terms of their deposits. So it meant that the finance companies, that were probably a lot of them were going to topple over, were actually protected and actually for free and there was quite a bidding war which pushed up the deposit rate. Which was good for a lot of people, but then you have to have a Margin, and Don can speak to this much better than I can, but that margin is where the banks remain profitable. And there’s no doubt that bad debt is going to go – I would expect bad debt is going to be going up looking forward.

PAUL And there’s also the cost of the international money isn’t there, the cost of the long term money?

ANDREW I don’t think anybody doubts that we want a sound banking system and by comparison with other countries clearly New Zealand and Australia have done very well, but let’s remember too that the more profit that the banks, the main banks in New Zealand generate, from its New Zealand customer base, the more profit goes back to Australia so let’s understand there’s a swings and roundabouts here in terms of the New Zealand Inc approach.

PAUL Now the house is sitting, that’ll do us on the banking – so it remains clear as mud. The house is sitting next week so the National Caucus meets on Tuesday – no Richard Worth, but will Cam Caulder be there I wonder?

DON Yes he will be. Quite clearly, he will be there, and I think that’s a good outcome. I’m sorry for Richard Worth personally, but Cam Caulder fought very hard indeed to win the last election – he thought he was in on election night, and he’s been out for the last six or eight months He’ll be there.

PAUL Anything you’ve got your eye on this week?

ANDREW Well, David Shearer will have his first appearance at the Labour Caucus, obviously he won’t be sworn in for another week or two yet, but otherwise apart from ongoing concern and anxiety about swine flu and the numbers of people falling ill, and who’s going to pick up the cost of that, I think life’s probably as dull as ditchwater.

PAUL I know, I’m worried about the swine flu at the Fieldays this week –so many people milling around and touching….

ANDREW …the pigs…

PAUL ..no, no not the pigs, it’s not the pigs that worry me it’s the people, so close to each other and touching food and stuff! Yes.

THERESE My colleague and I are bringing a group of wonderful students from Canterbury University, Honours students, to Parliament. We’re spending the week in Parliament watching, and meeting with people there and seeing how it’s done. I’m looking forward to question time on Tuesday – I think it’s going to be an exciting one.

ENDS

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