Banks profits in New Zealand are high by world standards and may be at levels that could be difficult to explain other than by a lack of competition, an analysis published by the Reserve Bank of New Zealand in its quarterly
Bulletin suggests.
The article surveys issues around measuring the efficiency of the New Zealand banking system and asks whether "the concentrated nature of the New Zealand banking system raises questions about the level of competition in the New Zealand market.
"This concentration would be of concern if it allowed banks in New Zealand to maintain excessive margins on lending or high fees on other products."
The article notes that "the return on equity in the New Zealand banking system appears to have been very high by OECD standards", but concedes this could be due to "relatively low operating costs as a share of income, and relatively low loan losses."
The wider profit margins in New Zealand may not be a function of the business mix, since banks, overall, undertake little insurance and investment banking activity.
"It appears that the New Zealand banks have been able to earn relatively high net interest margins and non-interest income despite the low risk, traditional nature of the banking system," the article says.
The authors consider whether "the relatively high ROE in New Zealand... could relate to higher costs of capital facing New Zealand" but then discount the thesis.
Over the 2000/09 period, the banks earned ROEs around two percentage points higher than the NZX 50 average.
"The average profitability of the New Zealand banking system does appear somewhat high, given the relatively low volatility of returns compared to other industries," say the authors.
The article also considers whether high returns made by major banks are necessary to ensure the support from their Australian owners, but notes that "capital ratios of New Zealand subsidiary banks are similar to those of the Australian parents, and it remains an open question why the Australasian banking system as a whole has been relatively profitable."