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Bank competition study on services, prices and profits

The Commerce Commission’s focus in its study into bank competition will be personal banking and mortgage lending.

Friday, August 11th 2023, 7:00AM 1 Comment

by Sally Lindsay

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.


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.

Tags: banks

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Comments from our readers

On 11 August 2023 at 2:14 pm Amused said:
Illustrates the lack of value that the taxpayer is getting nowadays from the Commerce Commission that business banking wasn’t included in this study. As an economist pointed out the Commission needs to probe competition in small business banking, a sector which some think is less competitive, and less transparent than personal banking. Personal banking is where we have got the least problems, business banking is where we have got the most problems and where we have the biggest opportunity to fix things.

The only people who will actually do well out of this study now by the Commerce Commission are the law firms and the consultants and the price will ultimately be borne by the banks’ customers, workers and shareholders. These inquiries are not costless.

Each bank will likely have to spend millions now in counsel to assist with gathering whatever materials are required to comply with the Commission. Then there will be, of course, no small amount of internal staff time as well. All in aid of something that based on previous market studies, is unlikely to help consumers.

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AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.45 7.05 6.85
ANZ 8.64 7.99 7.69 7.49
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.39 7.09 6.89
ASB Bank 8.64 ▼7.39 7.05 6.85
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
Bluestone 9.24 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Classic - 7.35 7.05 6.85
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.95 7.65 7.45
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 7.10 - -
Co-operative Bank - Owner Occ 8.40 7.30 7.05 6.85
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.80 7.55 7.35
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.99 6.85 6.65
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.85 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.79 7.59 7.29
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 8.35 8.05 7.79
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 7.35 7.05 6.89
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.90 7.75 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.30 7.89 7.69
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.30 8.89 8.69
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 8.05 7.65 7.29
SBS Bank Special - 7.55 7.15 6.79
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 7.05 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 8.19 7.89 7.65
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 7.39 7.09 6.85
Unity 8.64 6.99 6.99 -
Wairarapa Building Society 8.60 7.15 6.94 -
Westpac 8.64 7.99 7.59 7.35
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.39 6.99 6.75
Median 8.64 7.45 7.40 6.87

Last updated: 7 December 2023 9:28am

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