Explainer: Why banks are making so much cash and will it benefit Kiwis

By Sharon Brettkelly for RNZ's The Detail

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Big bank profits may make our eyes water, but are they a necessary evil to keep the money mill turning?

The New Zealand banking sector is set to post an annual profit of $10 billion

That's a one with ten zeros after it. 

"The sector is a massive beast," says John Kensington, head of banking and finance at KPMG tells The Detail.

"The main thing has been New Zealanders' love affair with property," he says.

"Whether it be their home, their rental property, their bach, or their workplace, New Zealanders have a disproportionately high property portfolio. 

"So if we want to do something like that, we have to borrow, and effectively the banks have been the conduit. They've borrowed from offshore, they've borrowed from New Zealanders, to lend to other New Zealanders."

Kensington explains how New Zealand, up until Covid-19, had an "astonishing" period of economic growth where people were confident and bought up large in property, which in turn made the banks grow.

Then the pandemic hit.

Kensington says banks realised the constraints placed on people and business by the pandemic would mean they wouldn't be able to pay their debts. In response, banks "prepared to provide for those losses".

But large injections of cash into the economy from schemes like the wage subsidy meant those losses never came.

"Covid threw up a dark cloud, but then the dark clouds never eventuated because of the level of government support."

Now on the other side, banks are beginning to adjust their controls.

At a time where many households are feeling the pinch with soaring inflation, posting such enormous profit could paint a picture of economic prosperity ticking up without trickling down.

It looks like most of that prosperity isn't staying in New Zealand, either.

The four big banks - Australian-owned ANZ, ASB, BNZ and Westpac - are responsible for 85 percent of bank lending, while the five New Zealand-owned banks account for only nine percent of lending.

But Claire Matthews, an associate professor at Massey University business school, points out that a good chunk of the money is being reinvested domestically.

"They still employ large workforces of [New Zealand] staff whom they have to pay."

In the six months to the end of March 2022, ANZ had half a billion dollars in expenses associated with personnel. In the financial year to September 2021, BNZ reported $600 million of the same.

"Then they've got rent for premises, most of which will be owned in New Zealand. They've got to pay for technology, and they'll be paying for services," Matthews says.

Matthews says we should want banks to be turning a profit, because otherwise they're losing money.

"If they're losing money, it's the customers who potentially are at risk in terms of losing the funds that they've got on deposit."

"Because it's been so long since banks haven't done well, we've kind of forgotten that that can happen."

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Explainer: Why banks are making so much cash and will it benefit Kiwis