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Bank profitability: a relative rip-off The Fiji Times, 27 November 1998

29/03/2012

As a result of public complaints, The People’s Coalition Government  has established a Committee of Inquiry into Financial Services.

But the banks don’t want to give the information that is being requested by the Committee.

Can you imagine what will happen if the Committee finds that the complaints of the public on interest rates and bank charges do have some justification?

The committee will recommend changes in favour of the public.  These changes will inevitably lead to some reduction in bank profitability.

And the banks will complain that this will lead to unacceptably low rates of profit for them.

But is the profitability of the banks currently squeezed to the bone? The available data indicates that the banks are doing very well, thank you.

Improving profits (1992- 1997)

By a useful coincidence, the relevant data in the recent Annual Reports of the Reserve Bank relate only to the five commercial foreign-owned banks (i.e. excluding the NBF).

This data shows clearly that between 1992 and 1997 these banks significantly improved their profitability.   The biggest improvement in their

profitability came from their net interest income which grew by a huge 87 percent. (Look at the last column in Table 1).

Table 1     Interest incomes and  expenses and profitability: 5 commercial banks

 

1992

1997

% Change

Net interest income ($m)

37

69

87

Commissions and charges ($m)

21

29

38

Foreign exchange profit ($m)

14

16

16

Total  Operating Income ($m)

74

116

57

Total Operating Expenses ($m)

50

63

26

Net Profit before tax ($m)

19

47

154%

Now “net interest income” is the difference between the interest they charge us on the loans they make and the interest they pay us on our savings deposits.   Relatively speaking, we have been paying more when we borrow from the banks, and we have been receiving less on the deposits we have given them.

The income from their commissions and charges grew by 38 percent. In contrast, their operating expenses (mainly wages and salaries) grew by only 26 percent.

The final result: “Net profit before tax” grew by a massive 154 percent (see the last row of Table 1).  This cannot but be called a fantastic improvement in the banks’ profitability over a period when the public has been complaining about high loan charges, high other charges, and low deposit rates.

Another bit of evidence that the foreign banks in Fiji have been doing very well, is by comparing their rates of profit here in Fiji, with what their parent companies are making (largely in Australia and NZ).

Fiji Profits better than parent companies

Look at Table 2 which compares the data for  ANZ and Westpac in Fiji, with similar data for their parent companies, operating in Australia and NZ.  The interest incomes and interest expenses are as proportions of Total Assets.

Table 2      Percentage higher in Fiji
(comparing with parent company)
 

ANZ

Westpac

Interest income as % of Total Assets

15

20

Interest expense as % of Total Assets

-31

-25

Net interest inc. as % of Total Assets

96

100

 

Profit before tax as % of Tot.Assets

227

115

In Fiji, “interest income as a percentage of total assets” is 15% higher for ANZ and 20% higher for Westpac, compared to the same ratio for their parent companies.  The positive difference implies that they charge relatively higher interest rates in Fiji.

And in Fiji, “interest expense as a percentage of Total Assets” is 31% lower for ANZ and 25% lower for Westpac, compared to the same ratio for their parent companies.  Thus they pay relatively lower interest rates in Fiji, compared to their parent companies.

And naturally therefore, their “net interest income as a percentage of Total Assets” in Fiji, was 96% higher for ANZ and 110% higher for Westpac, than the same ratio for the parent companies.

We keep in mind that wages paid in Fiji are much lower than in the parent companies.

It is therefore not surprising that in Fiji, “profit before tax as a percentage of Total Assets” is a massive 227% higher for ANZ and 115% higher for Westpac, compared to the same ratio for the parent companies.

  There is little doubt, that the foreign  banks in Fiji are far more profitable than in the parent companies.

The main factors would seem to be the relatively higher interest rate charged borrowers, the lower interest rate paid depositors, and the lower wages paid to workers, in Fiji.

The evidence indicates that there can be an improvement in the interest rates for borrowers and depositors, without necessarily taking the banks below the rates of profit considered acceptable for their parent companies.

  Reducing bank branches and agencies

The evidence also indicates that the banks have improved their profitability by constraining operating expenses.

“Personnel costs” as a percentage of Average Total Assets have gradually declined by some 11 percent, between 1992 and 1997.  This is despite the fact that the asset base managed by the staff has increased significantly.

The data also indicates that the three major banks (ANZ, Westpac and NBF) reduced the number of branches from 41 in 1992, to 32 in 1997.  The reduction in agencies is even more severe, declining by 77, from the high of 164 in 1993.

The decline in the number of branches and the number of agencies mean that customers have faced a dramatic reduction in the quality of service provided by the banks.

Customers have to travel greater distances obtain services, while bank officers are increasingly out of contact with their client base.

The biggest sufferers have been the thousands of small borrowers and depositors who have been vociferously complaining over the last few years, to no avail.

Conclusion

The data on bank profitability indicates that the Committee of Inquiry should make a number of strong recommendations.

Borrowing interest rates should be reduced. Deposit interest rates should be increased. Unreasonable charges withdrawn or reduced. And banks be encouraged to provide reasonable services to rural areas and small borrowers.

Despite the current much publicised flourishes in the financial markets by some of the commercial banks, “free markets” are unlikely to bring about the desired results.

The Committee should think carefully as to how and by whom its recommendations will be translated into policy changes imposed on the commercial banks.

Government (the Ministry of Finance) has a legitimate right to be concerned that the interest rate should be at the appropriate rate for the economic growth and development of the economy.

But government is itself the largest single borrower in the money markets and therefore an interested party in the lending and borrowing rates.

Policies on interest rates (and other charges) should continue to be the prerogative of the Reserve Bank.

The Committee is urged to ensure that, wherever possible, their recommendations are implemented through the Reserve Bank, rather than Government.

Government should get into the act only as a “last resort” should the Reserve Bank indicate that it does not wish to, or, does not have the capacity to do so.

 

 


[1] The People’s Coalition Government.

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