As you may have noticed, Radio New Zealand, a dominant player in the New Zealand media landscape, featured banks frequently this week. There were valid reasons for that. There was the demise of Silicon Valley Bank, which sparked unrest in the financial markets, which then affected Credit Suisse, the sickest bank in Europe. It is reminiscent of the Global Financial Crisis, except that this time we are fifteen years older and also more prepared. The resilience of the banking sector has improved globally and regulators have a better understanding of the financial system. They know how to respond properly – way better than letting a systemically important bank collapse to make the point that they are Fed up with bailing out banks.
There was also the publication of the KPMG FIPS report, which highlighted, among many other things, the profitability of our domestic banking system.
RNZ is the primary radio station for those who are interested in politics and policy. In many respects, New Zealand’s RNZ punches above its game: it offers top-notch radio programs. However, if the consistency of the quality of RNZ were to be uniform, I would not write this post.
So, yes, I can see why RNZ devoted time to banks this week. And I can see the events unfolding at various news desks. As Silicon Valley Bank unraveled quickly and during the weekend, producers reached for their devices to Google the latest on SVB. They also scrambled to their Rolodexes to find bank specialists to discuss the global financial unrest as well as New Zealand’s bank profitability.
That led to interesting coverage. Some highlights:
On Monday, Morning Report’s Corin Dann contacted a US-based equity analyst from an unknown firm to discuss Silicon Valley Bank. I felt sorry for the guy who could not elevate that radio segment above the level of reading tea leaves.
Gyles Beckford on Wednesday raved about the profitability of the Brisoe Group. Its net profit last year was $88 million, up from $87 million last year. Of course, these numbers are smaller than those of the Big 4 banks. But the Group’s sales margin is close to 10%. This means that for every $100 you pay at your local Briscoes checkout, about 10 dollars end up in the owner’s pockets. And the owners will not complain: their return on equity is 29%, more than twice that of our banks. Return on assets for the Group was 12%, which is also very strong.
Looking at these metrics, I would expect some pointy questions from Beckford challenging these super profits. Instead, he voiced the concerns of Brisoe Group’s director Rod Duke that next year is going to be a lot more difficult. What else would one expect him to say? That his firm will make even more next year?
On Thursday, Corin Dann appeared to entertain the idea of letting banks fail to reign in inflation. Let that sink in: Another Lehman-like collapse could get us past the cost of living crisis. On Friday, Dann appeared to question the idea of future rate hikes given the current financial turmoil. It is known that the RBNZ takes a long view before deciding on the official cash rate.
So, yes, RNZ once in a while struggles to get its act together on business, banking, and economics.
However, if this was all, then you would not hear me complain.
KPMG’s Financial Institutions Performance Survey
The problem that I have with RNZ is its reliance on KPMG’s Financial Institutions Performance Survey (FIPS) report. Its publication prompted RNZ to report on excessive bank profits multiple times this week. On Tuesday, Morning Report aired the segment Banks need profit buffer to protect them, which focused on the $7.2 billion dollar profits that New Zealand’s banks make. The segment featured KPMG’s John Kensington, who continued to explain that the profitability of banks is actually not that high. The next day, Nine To Noon invited Kensington again, this time to comment on the safety and soundness of our financial system in a segment on deposit insurance.. Here, Kensington compared bank runs with runs on toilet paper.
I struggle with the dominance of KPMG on the radio this week. Perhaps ten years ago, it would have made sense to use the publication of the FIPS report as a prompt to invite Kensington for comments. However, things have changed. First, the Reserve Bank gives us electronic access to a lot of bank-related data, for example via the RBNZ Financial Strength Dashboard. The Dashboard offers most of the information published in the FIPS report. However, the prize-winning Dashboard is easy to navigate and presents relevant data in an eye-candy format.
The Dashboard also gives us historical data in a spreadsheet, so bank nerds like me can analyze trends. For example, the graph below shows that bank profits are volatile. Which means that next year’s profits are likely to be lower than this year’s, and this year’s profits may be higher because last year’s profits were lower. The Dashboard data also shows that banks are more vulnerable than others in terms of capital adequacy. Kiwibank, for example, even under new (State) ownership, lost capital. At the same time, it increased its risk profile by lending more to businesses and relatively less to homeowners.
Second, KMPG is not the firm that it was, say, thirty years ago. Once a reputable audit firm, it has now reinvented itself as a consulting firm, and consultants are under fire as of late. See Bryce Edwards recent concerns in the Herald.
KMPG’s reputation for auditing has weakened over time. For example, KPMG signed off on the financial report of Silicon Valley Banks just a few weeks before its collapse. And I am sure that the firm will claim that it has done nothing wrong. But if I were to challenge the auditor about the sustainability of some of the bank’s asset valuations, I would probably counter the reply with a resounding “Really?”
KPMG regularly gets in trouble for dodgy auditing. Carillon is one example, Rolls-Royce is another. And it is not only auditing. KPMG was involved in a widespread UK cheating scandal. But the weirdest scandal in which KPMG got itself into was the one involving bed company Silentnight. According to the Guardian, one of KPMG’s senior partners lied in an investigation into the scandal. Think of it: David Costley-Wood, senior partner at KPMG, just making up stories to defend himself. The weird part of this story is that we bought David’s home back in 2000, when we lived in Lancaster. He seemed like a decent family man. And he likely was, until, of course, things turned horribly wrong. To lie in a formal investigation and then have your employer, KPMG, pay for it, is weird indeed. It makes one wonder about KPMGs company culture.
Lastly, I am not sure if this edition of the FIPS report has the same stature as previous ones. It looks like a grand PR exercise, well-coordinated with the banking sector, with little depth and much spin. The section on bank profitability, for example, is defensive and, at times, misleading. The report uses various tactics to defend bank profitability. For example, the report plays the fear card by suggesting the following doomsday prospect:
It then uses Associate Professor Claire Matthews to support this self-serving spin:
As I often argue, New Zealand has a rock solid and resilient bank system that serves its country well. The prospect of it suffering a crisis because of a temporary dip in profits shows a poor understanding of our financial system.
The report proceeds to mislead the reader by using the banks’ 1.08 percent return on assets (ROA) to downplay profitability. Bank ROA ratios are always low, and banks use leverage to translate low ROAs into high return on equity (ROE) ratios. For that reason, the report’s graph shown below is almost absurd because it ignores leverage (or gearing):
In all, I call upon RNZ to rethink its reliance on KPMG and the FIPS report. There are many high-quality alternatives, such as the RBNZ statistics and the RBNZ Dashboard. There are also New Zealand-based, independent academics who can offer unbiased views on economics, business, banks, and banks runs without having to refer to toilet paper.
RNZ should recognize the FIPS report for what it is, a PR exercise that serves the commercial interests of a firm that is no longer the firm it used to be. Asking KPMG to comment on banking is like asking the likes of BHP Billiton and the Coca-Cola Company to comment on environmental issues. Really?
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