ANZ, Westpac and BNZ all posted strong half-year profits. But the narrative that banks make money in any environment is more complicated than it looks — and the latest results contain some important nuances.
New Zealand's big banks have posted another set of solid half-year profits. ANZ made $1.26 billion. Westpac posted $545 million. BNZ reported $494 million. In an economy that has been described as reeling from one shock to the next, some observers have noted this appears to support the idea that banks are among the few businesses that can reliably turn a profit regardless of conditions. The reality is more nuanced, and the banks' own disclosures give a more detailed picture.
The annuity model argument
David Cunningham, chief executive of Squirrel and former CEO of The Co-Operative Bank, said it was broadly fair to characterise banks as businesses that generate reliable earnings through the cycle. His reasoning: even if a bank did nothing for a year — stopped lending, stopped accepting new business — it would still collect the vast majority of its profit from the existing book of loans already on its books.
"Banks typically grow at around the nominal GDP rate," he said. "If you think of inflation at 3 percent and real growth at 2, so nominal GDP at 5 percent, that's pretty much what you'd expect banks to achieve consistently over time."
This describes the structural mechanics of banking well. The spread between what banks earn on their loan books and what they pay on deposits — net interest margin — tends to be sticky, particularly when interest rates are high. Banks reprice mortgage rates relatively quickly when the official cash rate rises, while deposit rates adjust more slowly, creating a temporary margin expansion that supports profitability.
Where the argument breaks down
Claire Matthews, a banking expert at Massey University, cautions against the view that banks are simply immune to economic conditions. Westpac's own half-year report explicitly cited worsening economic conditions and margin compression — as the official cash rate fell — as factors weighing on its result. BNZ's profit was down 38 percent, reflecting in part a change in the way it accounts for software spending, but also reflecting the same margin pressures affecting its peers.
"The banks have managed not to lose money in recent recessions, which reflects careful financial management and the fact that we haven't had a really substantial downturn," Matthews said. She also noted that banks typically feel the effects of economic downturns later than other businesses: "It takes time to work through to the banks."
Investment specialist Greg Smith put it another way: the banks are navigating the other side of the interest rate cycle. Early in a tightening cycle, when the RBNZ is raising rates, banks typically benefit from that repricing dynamic — mortgages reset upward faster than deposits, widening margins. That dynamic supported profitability through 2023 and 2024.
"What we're seeing now across ANZ, NAB and Westpac is the other side of that cycle starting to dominate," Smith said. "Higher rates are now feeding through to customers, with banks lifting provisions for bad debts and flagging stress in parts of the economy. Competition for deposits and mortgages is intensifying, putting pressure back on margins."
What the numbers are not showing
There is a distinction worth noting between the headline profit figures and the underlying trend. The absolute level of bank profits remains high. But earnings growth is limited or declining at most of the major lenders, and provisions for potential loan losses — money banks set aside against the possibility that borrowers cannot repay — have been rising.
That is the mechanism Matthews refers to: banks typically recognise the impact of economic stress with a lag. The accumulation of provisions during uncertain times is a signal that management is attentive to downside risk. Whether those provisions are sufficient will only become clear if economic conditions deteriorate further.
For context, New Zealand has not experienced a truly severe banking sector stress since the 1990s. The global financial crisis produced much larger write-offs in other markets, but New Zealand's banks entered that period relatively well-capitalised and were not forced into the kinds of losses seen in the US, UK, or Ireland.
The question of whether banks deserve their return on equity — currently around 13-14 percent for some of the major players versus closer to 10 percent for their Australian parents — is a legitimate one for policy discussion. But the answer depends on what risks are being priced in, and whether the current environment is one where those risks are being adequately reflected in provisions.
This article is for general information only and is not personalised financial advice. Seek advice from a licensed financial adviser (registered on the FSPR) for guidance specific to your situation.