Lisa Owen interviews Labour MP David Shearer & Bankers Association CEO Kirk Hope

Labour says banks aren’t giving Kiwis a fair deal on credit cards, leaving the poorest New Zealanders to struggle with debt.

“Why is it that credit cards are still 17% and 18% when the banks’ lending has come from 8.5% right down to 3%? That margin has shrunk for the banks, but it hasn’t shrunk for the customers,” says David Shearer.

Bankers Association says because credit cards are unsecured, rates need to be higher and cheaper credit cards are available.

Some farmers are “pretty desperate” and getting pressure from banks, says Shearer, but Kirk Hope says banks will support farmers as they did kiwifruit growers during PSA.

Shearer: Australian banks’ profits “in New Zealand are in excess of what they are doing in Australia” and “it’s about time we took a really close look at what’s happening here in New Zealand”

Hope: Profitable banks are important, for example supporting farmers in these tough times, and their return on equity is only average amongst New Zealand’s top 50 businesses.

“If you don’t have profitable banks, you have unprofitable, and I think Greece, Cyprus, the UK, the US have experienced those types of situations, and it’s very far from where we’re from and where we want to be.”

Hope downplays Standard & Poor’s credit rating downgrade, saying Moody’s has maintained its ratings and NZ banks are “incredibly low-risk in comparison to their peers”

Lisa Owen: It’s no secret that most banks in New Zealand are owned by big Australian companies, but are they ripping us off, and how worried should we be about Friday’s credit ratings downgrade? Labour’s consumer affairs point man, David Shearer, has been picking a fight with banks in recent days, accusing them of making excessive profits. He joins me now in the studio, along with the Bankers’ Association chief executive Kirk Hope. Good morning to both of you.
David Shearer: Good morning.
Kirk Hope: Good morning.
If I could come to you first, Mr Shearer, our banks got huge kudos for their behaviour during the global financial crisis and they’re regarded as some of the best in the world, so how are they rorting us?
Shearer: Well, look, first of all, I agree, we are lucky in having good solid banks that saw us through the financial crisis, no doubt about that. And I don’t have a problem with companies making profits, but we’ve gone from $3.6 billion after tax in 2013 to $4.4 billion – a 20% increase. That’s a massive increase. That’s about $1000 per man, woman and child in New Zealand. And the rates of profit that the banks are taking in New Zealand are in excess of what they are doing in Australia. And my point is, look, fine, it’s great we’ve got these financial institutions that are there and underpinning our— basically our financial system, but they should be fair on our consumers, and are our consumers getting a good deal when their profits are going up at an extraordinary rate year on year. And I think we need to take a good look at it.
Mr Hope, fair point, isn’t it? Record profits in 2013 and 2014 – you’re on record for— you’re heading towards a record profit for the year. How are you not ripping us off?
Hope: Well, I think as you’ve both acknowledged, actually profitable banks are strong banks, and what strong banks can do is continue to support the economy in a downturn. Say, for example, the types of things that are happening at the moment in the dairy industry – banks have strong balance sheets because they’re profitable and they’re able to support farmers, for example, if they start to encounter tough times. So I think the answer is, if you don’t have profitable banks, you have unprofitable, and I think Greece, Cyprus, the UK, the US have experienced those types of situations, and it’s very far from where we’re from and where we want to be.
But, Mr Shearer—
Shearer: I don’t actually— Look, I agree we need strong banks. I think citing the example of Greece and saying if we don’t have banks that make excessive profits, then we’re going to end up like Greece. I don’t buy that as an argument. What I do believe is that obviously banks should make a profit. If they don’t make a profit, they’re going to be broke, but they don’t have to make an increase in profit year on year on year. And so, what, on Thursday— Wednesday or Thursday this week, the ASB made a new record profit. The parent— Remember that these banks – 86% of the banking in New Zealand is done by four big banks that are owned in Australia. The parent of ASB, the Commonwealth Bank, made the biggest banking profit in Australian banking history. So they’re doing the same thing in Australia, which is why at the moment we’re looking some inquiries into the banking in Australia, and I think it’s about time we took a really close look at what’s happening here in New Zealand as well.
So, Mr Shearer there saying you don’t have to make more profit, more profit, more profit each year?
Hope: I mean, I think you need to put what— you need to define what excessive profit is. We’ve done some analysis, or, actually, Massey University did some analysis on our behalf, which put the banks’ return on equity within the context of New Zealand’s top 50 listed companies, and bank returns fell firmly in the middle of the pack for those companies, so—
But why do you need to make more money here off your New Zealand customers than you’re making in Australia?
Hope: Well, I guess, again, what you’re talking about is a percentage increase, and I think what you need to recognise is— well, I suppose there’s another component to this. New Zealand banks are actually carrying more capital than their Australian counterparts as well, so that’s money which is reinvested into New Zealand.
Shearer: But I think that your point is right. I mean, they are actually making proportionally more money in New Zealand than they are in Australia, so it’s 1.6% over assets here and it’s about 1.24 in Australia, which means that, actually, they’re really cranking up the profits here in New Zealand. And, remember, they are Australian-owned banks, so a proportion of that profit flows back across the Tasman into Australia.
So, Mr Hope, is there room for you to cut us some slack here – cut your customers some slack?
Hope: Actually, one of the other reasons why New Zealand banks are more profitable is because their cost-to-income ratio is lower than their Australian counterparts. So the New Zealand subsidiaries have invested in different types of technology to reduce those cost-to-income ratios, so that’s another reason why they’re more profitable.
But it’s still costing customers in the end, isn’t it, if we’re adding to bigger profits here? Still costing customers.
Hope: I suppose the other answer to that is all of the KiwiSaver funds are exposed to the Australian bank profits, right, so as KiwiSavers, you’re able to access those profits as part of your KiwiSaver growth.
Shearer: But I think the point is the banks make three-quarters of their money through the difference in interest rates between what they lend out as mortgages and what they give out as term deposits. The costs, as Kirk says, is right, but that’s only 25%. So our costs are lower, so that helps, but our interest – the interest rate difference between what we lend out and what we give out in term deposits is greater in New Zealand than it is in Australia. In fact, it’s greater than most other countries around the world.
Hope: I disagree with that, actually. Our margin – the margins in New Zealand are some of the lowest in the world. The reason that we’re more profitable, as I said, is because we have a lower cost-income ratio.
What lending are you specifically talking about there?
Hope: So we’re talking about across the banks’ entire lending base.
Okay. Well, aren’t you at risk, Mr Shearer, of just looking like a whinging lefty who doesn’t like a successful business? Isn’t that the risk?
Shearer: No, look, I’m the Consumer Affairs Spokesperson, and quite frankly, I look at the amount of money that the banks are taking out in profit, and as I say, they’re Australian banks, and they’re 87% of our market here in New Zealand, and I think that’s it’s right that you point the finger and say, ‘Look, we want to get the best value that we can for our consumers in New Zealand,’ and if the banks aren’t doing that, then it’s right that we point the finger. Now, in Australia right now, there’s a senate enquiry into credit cards. Why is it that credit cards are still 17% and 18% when the banks’ lending has come from 8.5% right down to 3%? That margin has shrunk for the banks, but it hasn’t shrunk for the customers out there.
Mr Hope, why are people still paying big interest on credit cards when money is so much cheaper?
Hope: Well, I think there’s a couple of points just to answer some of those questions. I think, actually, we’ve got a highly competitive banking market here which enables customers to access interest rates much more cheaply than they have ever before, and on that front, I mean, if you take the credit card example, so more than 50% of people pay their credit card off in full every month – only between 1% and 3% pay the minimum – so actually…
But that leaves you with 40-something percent of people who aren’t paying that debt off in full, and I bet you that those are some of your poorer customers.
Shearer: That’s exactly the case, and it’s $4 billion of money that is on credit cards. It’s a large amount of money that is... And it’s mind-boggling, really, when you think about the population of New Zealand and how much is owed on our credit cards, and as you say, it’s the people who are struggling that tend to pile more money on to their credit cards and pay 17.5% interest.
Hope: Actually, one of the challenges has been that so in the past, if you issued a credit card to someone, you wouldn’t know whether someone else had issued a credit card to them, so you couldn’t tell whether a customer had three or four credit cards, so they might be making repayments. Now, what’s happened subsequent to the recognition of this is there’s a new comprehensive credit reporting process which enables banks to be able to assess where they have a customer or a credit card customer that is not a customer of their full banking account, so what they are able to then do is say, ‘Ok, well, you’ve got five credit cards now. We can see that you’ve got five credit cards – before we couldn’t – so we’re not going to issue you with another credit card,’ which I think is beneficial for particularly those…
So you’re trying to be more responsible in who you give the credit cards to. But what about the interest rates? It still comes back to that same question. Why are people still paying 19%, 20% on their credit card when there’s been a drop in the price of interest?
Hope: Again, credit cards are unsecured lending, so they naturally have a higher rate. They used to be attached to… You used to bundle them up with mortgages – that no longer happens. But there are also a broader range of credit card products which mean that people who can’t afford to pay 17% or 20%, they can access those products. You know, these might have less rewards with them – products with less rewards…
And higher fees too – in some cases higher fees?
Shearer: And that’s another thing – I mean, New Zealand is one of the few places who charges those sorts of fees on our credit cards. In most other credit card places in the world, many of those fees have actually disappeared.
In the time we’ve got left, I want to talk about the farmers. There’s lots of farmers under pressure at the moment, and from government ministers down, they’re saying that they want the banks to cut them some slack, so what are your banks doing?
Hope: I think, as I said before, what being profitable means is that the banks can help support farmers through what is effectively going to be a fairly long part of a commodity cycle. Nevertheless, it’s a commodity cycle – I think banks are taking a long-term view about this. In an example of that where they’ve done this previously is with kiwi-fruit farmers in the PSA, where they experienced the PSA issues, so I think what banks were able to do is support that group of farmers through that – it was pretty much a crisis – and enabled them to get through it, and they’re now profitable again. I mean, they’re announcing record profits.
What are you hearing, Mr Shearer?
Shearer: What I’m hearing, and I’m talking to some Northland farmers this week, and certainly Federated Farmers is running a questionnaire on banks and what’s happening, that the banks are calling these farmers in and saying we need to have a bit of a chat, because many of them are dairy conversions; they were encouraged by banking, agriculture advisors to go out and take more debt on, and now they’re sitting there thinking… I mean, they’re pretty desperate, and the banks are saying, ‘We’re going to have to take a look at the value of your farmland and check out how it’s working.’ Now, yes, there’s a lot of rhetoric out there saying, ‘We’re getting alongside farmers,’ and I really really do hope that’s the case, but I can guarantee that when profits start to bite, they start to go down – and they will start to go down, because the Australian banks now have been asked to put more capital aside by their downturn in their ratings – then there will be pressure on banks to go along and look at those unprofitable farms and put more pressure on those farmers.
Kirk, just before we go, I want to ask you about this – Bill English has said that house prices could drop and we see that Standard & Poors have dropped banks’ standalone credit ratings a notch, so is that something to be worried about?
Hope: Well, no, I think that Moody’s, for example, have retained their credit rating for the major banks. I think S & P, what they did recognise was that, yes, housing was a risk, but the New Zealand economy and New Zealand banks were incredibly low-risk in comparison to their peers in the rest of the world. I just want to—
Shearer: But just come back over, because I think Standard & Poor’s, they brought it down because the housing market was rocketing along, and that’s the same thing here as it is in Australia. I mean, the housing market is getting seriously out of control, and they’re asking the banks to put more capital aside. It’s exactly what the— the Murray inquiry in Australia did exactly the same thing.
Okay, before you go, Mr Shearer, in 10 seconds, do you want an inquiry into the banking sector?
Shearer: I don’t believe right now that we need to bring in the big guns, but what we do need to be saying to our banks is, ‘Look, we’re watching you. We want to see a fair go and particularly a fair go for farmers that you encouraged to take on more credit and now going to be facing the gun.’
All right, we’ll leave it there.
Transcript provided by Able. www.able.co.nz

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