Kiwi banks' massive profits could be sign they're not taking enough risks - Cameron Bagrie

A leading economist believes the staggering profit New Zealand's banks are making is a sign they're not taking on enough risk.

New Zealand has 27 registered banks, with four large Australian-owned companies - ANZ, ASB, BNZ and Westpac - responsible for 85 percent of bank lending, according to the Reserve Bank of New Zealand. 

Bank profits are continuing to grow and by the end of September, experts believe their combined profit for the previous year is likely to rise to $10 billion. 

The banking sector posted a quarterly profit of $1.74 billion for March 2022, up 8.08 percent from the previous quarter, according to a KPMG survey.

Independent economist Cameron Bagrie told AM on Tuesday the Reserve Bank's figures showed for the 12 months ending in June, the combined profit for the 27 banks in New Zealand was around $9.7 billion. 

He said he expects that figure to creep up over the $10 billion mark when the next figures are announced.   

"If you look at the run rate in regard to what we've seen across the bank results over the past three to four quarters, they're pretty clearly on a rising trajectory," he told AM co-host Ryan Bridge.   

"I suspect that $10 billion number, that's pre-tax, banks like to report the post-tax figure but I think it's the pre-tax figure that's a little bit more enlightening in regard to what's going on and it just looks like they're going to crack that $10 billion mark."

Bagrie said banks should be making big profits as they're large entities and have large balance sheets but questioned whether there was enough competitive pressure through the market. 

"You've got the other side of the coin in regard to, have we got enough competitive pressure coming through the banking system? The banks in New Zealand, particularly the big four, make a lot more money on what's called return on equity basis compared to what we see in Australia," he said. 

He told AM the large profits banks are making, make him question whether they're taking enough risks. 

"One of the real issues here is, are banks actually taking enough risk or are they these really conservative organisations that are charging us a pretty good margin and actually not taking a sufficient risk, pushing capital out into the general economy," he said. 

Bagrie said banks have had the "odd" quarterly loss, but haven't recorded an annual loss over the last 30 years, which is "out of step" with what is happening around the world.

"Banks tend to do pretty well at the top end of the cycle, but of course, they're managers of risk," he said.

"They are channelling credit out into the general economy. You would expect occasionally you're going to take a little bit of a hit and do we see those hits in New Zealand?"

Bagrie said banks are becoming far more conservative because they're incentivised by the Reserve Bank to issue a lot more housing loans than business loans.

"There's a whole lot of things that we need to look at starting at the risk weights. The Reserve Bank sets these risk weights where the banks basically need to hold less capital against a housing loan versus a business loan," he said. 

"So banks are economically incentivised to write a lot more housing loans because they get what's called capital relief. If you look at what's happened over the past ten odd years, the banks have taken out an awful lot of staff …. That's a fundamental problem when you look at what the basic role of the financial system or the banks are in regard to channelling money into the general economy and the pricing of risk."