Banks take $3b profit overseas

Higher interest margins saw the big five banks take a combined profit of $3 billion over the 2011 financial year, most of it headed to Australian bank coffers.

Bank profits were up 18 per cent year on year and 26 per cent higher in the second half of the year than the first, according to a report by PricewaterhouseCoopers.

While the four Australian-owned banks – ANZ National, BNZ, ASB and Westpac – all boosted their profits in the latest half-year from the same period in 2010, Kiwibank did not.

The overall growth came from increasing interest income, growth in other operating income, and a modest reduction in operating expenses, the report said.

But the banks' huge profits did not necessarily mean customers were being ripped off, said PwC financial services partner Sam Shuttleworth.

"It's kind of a win-win", he said. "Banks have been able to increase their margin, but the net interest rate borrowers are actually paying at the moment – they're at historical lows."

The banks had been sourcing funds on the cheap after falling interest rates slashed borrowing costs. They had also been able to mostly self-finance since the second half of 2009, which provided some insulation from turbulence overseas.

The average net interest margin, the difference between borrowing and lending rates, rose four basis points to 2.27 per cent in the second half of 2011.

Massey University banking expert Dr Claire Matthews said the rates were reasonably high, but they had been steeper in the past. In part, the banks' profits reflected the ongoing recovery from the global financial crisis, she said.

"You could, to some extent, take it as a positive, in that it suggests that there is some recovery in the economy."

Most of the $3 billion profits would return overseas to the banks' parent companies, with some kept in New Zealand for capital spending.

Matthews said there was no direct benefit in the Aussie banks turning a good profit, but it ensured they would continue to operate and spend money in New Zealand,as well as employ thousands of staff.

The fastest-rising expense for banks was the amount of tax paid, up 47 per cent from the 2010 year to $1.3 billion. The increase was partly down to increased revenue, but also related to a major 2009 tax settlement with the IRD which affected several banks.

The final settlement was reduced from $2.7 billion to $2.2b, which left a surplus for the 2010 year and artificially reduced the level of tax paid.

Bad debt charges also rose to $379m in the second half of 2011, up from $355m in the first half, with both periods hit by the credit provisioning impact of the Christchurch earthquakes.

However, total bad debt expenses were down by 35 per cent in the 2011 full year compared with 2010, which Shuttleworth described as a "remarkable result" given the impact of the quakes.

The interest margins that helped boost profits were likely to decrease again, Matthews said.

BusinessDay