Bank lobby group the New Zealand Bankers’ Association (NZBA) says bank profitability, based on return on equity (RoE) over the past five years, comes in mid-table when compared with bigger sharemarket listed companies.

The New Zealand Bankers’ Association today released long run bank profitability data which compares returns on equity for New Zealand banks against NZX listed companies.

Independent analysis undertaken by Massey University showed that retail banks’ average return on equity over the last five years fell in the middle of the range compared to NZX listed companies with a minimum market capitalisation of $100 million over the same period.

A comparison of return on equity over the last five years is set out in this table.

“We wanted some analysis which put bank profitability in the context of other New Zealand businesses because there are a lot of views on bank profitability which we felt were overstated,” said New Zealand Bankers’ Association chief executive Kirk Hope.

Average bank returns on equity from 2008 to 2012 ranged from 7.5% to 16.3%, well below the top average return on equity of 31.7%.

“This analysis shows that banks fall in the middle of the range of profits compared to NZX listed businesses,” said Hope.

The Reserve Bank’s latest Financial Stability Report issued today has confirmed that banks are supporting New Zealand’s financial outlook in the face of ongoing global economic challenges.

“Well-regulated strong banks are part of New Zealand’s current success compared to other countries,” says New Zealand Bankers’ Association chief executive Kirk Hope.

The report identified a number of factors underpinning the banking industry’s strength.

The banking sector’s core funding ratio is around 84 per cent, well above the Reserve Bank’s current minimum ratio of 70 per cent, rising to 75 per cent on 1 January 2013. “That means banks are sourcing more funds from domestic savings and longer term wholesale funds, and are less reliant on shorter term overseas funding,” says Hope.

Banks are also set to meet the Reserve Bank’s new minimum level of capital they must hold, which is based on the Basel III international standards. While banks’ return on equity was up, it remains below levels before the global financial crisis due to this need to raise capital buffers.

“On top of this, interest rates remain historically low, and competition among banks is high. The reduction in the average net interest margin by six basis points to 2.25 per cent in the June quarter shows this,” says Hope.

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“It’s a useful step towards sorting out a very thorny and expensive compliance issue for us. We understand US moves to clamp down on tax evasion by Americans living around the world. But without an inter-governmental agreement, the US law’s provisions are virtually unworkable,” said Hope.

The New Zealand Bankers’ Association today applauded the government’s decision to seek an inter-governmental agreement between New Zealand and the United States which will help financial institutions comply with new US tax reporting requirements.

The Foreign Account Tax Compliance Act, also known as FATCA, is designed to ensure US citizens resident in other countries meet their tax obligations. It requires foreign financial institutions, including New Zealand banks, to identify and report on customers who are US citizens.

“The government’s engagement on this issue will be welcomed across the financial sector,” says New Zealand Bankers’ Association chief executive Kirk Hope.

“It’s a useful step towards sorting out a very thorny and expensive compliance issue for us. We understand US moves to clamp down on tax evasion by Americans living around the world. But without an inter-governmental agreement, the US law’s provisions are virtually unworkable.”

The agreement is expected to provide a practical way of meeting FATCA’s aims and allowing New Zealand financial institutions to comply. “While our banks will still incur costs around designing and implementing customer identification and reporting systems, we see this as a positive step,” says Hope.

Large profits in the banking sector  needed to be considered alongside the contribution banks made to the economy, Mr Hope says. “Last year banks contributed around $6 billion to our economy through the $4.5 billion they invest in running their businesses here, and the $1.3 billion they paid in tax.”

KPMG’s Financial Institutions Performance Survey (FIPS) report for the quarter to 30 June 2012 confirms that New Zealand banks are well placed to meet ongoing challenges.

Those challenges to the banking sector, and the wider New Zealand economy, include the continuing European debt crisis and a slowdown in the Australian economy, our largest trading partner.

“We need strong banks to support our economic growth. You just need to look at parts of Europe to see the devastating alternative,” says New Zealand Bankers’ Association chief executive Kirk Hope.

“The banking sector’s core funding ratio is at 84.3%, well above the Reserve Bank’s current minimum ratio of 70%. That means banks are sourcing more funds from domestic savings and longer term wholesale funds, and are less reliant on shorter term overseas funding.

“On top of this, our banks are set to meet the Reserve Bank’s new minimum level of capital they must hold, which is based on the Basel III international standards.”

The quarterly report revealed that banks’ average interest rate margin decreased by six basis points to 2.25%. “This shows an intense level of competition among our banks,” says Hope.

Banks’ net profit for the quarter was up compared to the March quarter, which recorded lower returns due to movement in the fair value of their investments and derivatives.

“Profits are part of the story, and so is the huge direct economic contribution banks make. Last year banks contributed around $6 billion to our economy through the $4.5 billion they invest in running their businesses here, and the $1.3 billion they paid in tax,” says Hope.

The banking industry’s lobby group has slammed the investment regulator over its guidance on how KiwiSaver should be sold, saying it will be harder for consumers to get information on the retirement savings scheme.

By rewriting the law, the Financial Markets Authority (FMA) is doing consumers a disservice says the New Zealand Bankers’ Association.

Following the release of the FMA’s guidance note on the sale and distribution of KiwiSaver, Bankers’ Association chief executive Kirk Hope expressed serious concerns.

“This is bad for consumers because it limits access to information about KiwiSaver products. By limiting who can provide information about KiwiSaver, they make it harder for consumers to make informed decisions. It could also force people to bear the cost of using specialist advisers.”

“The FMA has attempted to rewrite the legal test for what constitutes advice making it much more difficult to provide only information about KiwiSaver products. Guidance should not be used to extend the law. If the law is wrong, change the law,” said Hope.

The Financial Advisers Act 2008 regulates the provision of financial advice. Section 10(3) of the Act 2008 sets out what does not constitute “financial advice”. These exclusions include the provision of information about a product. Paragraphs 32-33 of the guidance note purport to override this, and suggest that in some circumstances providing information can be advice.

“They’ve made incorrect assumptions about the law, and Parliament’s intentions, and have ignored all submissions on this point. Their insistence that the Act includes a concept of implied advice is not correct. And they haven’t explained how they came to this view.