Local listing for banks: a case for one in particular

There was a very strange article in the Herald yesterday from one Duncan Bridgeman claiming that it was, in the words of the hard copy headline Time to force Aussie banks to list in NZ”.

What wasn’t at all clear was why.

Bank profit announcements seemed to be the prompt for the column

Australian banks reaping huge profits from their New Zealand customers is a perennial scab that gets ripped off every time financial results come in.

I’m not persuaded the banks earn excessive profits here, but I know some other serious people take the opposite view.  But even if they are right, surely that is a competition policy issue –  the case for one of the new market studies perhaps, and any resulting recommendations.  There is nothing in the article explaining how forcing the Australian banks to sell down part of their New Zealand operations would affect, for the better, competition in the New Zealand banking services market.

The other prompt appear to be industry developments in Australia

Meanwhile, Australia’s big banks are starting to move away from vertical integration, partly because of conflicts of interest but also because their financial services model is unlikely to sustain the same profits over the longer term.

Suncorp, ANZ, CBA and NAB have all divested their life insurance operations. The latter two have also announced plans to spin off their wealth management operations. Westpac remains wedded to these areas of business but is expected to follow suit at some point.

And just last week financial services firm AMP, also heavily damaged by the banking royal commission, announced the sale of its wealth protection unit to US firm Resolution Life for A$3.3 billion and divulged plans to offload its New Zealand wealth management and advice businesses through a public offer and NZX listing next year.

But not one of those divestments has anything to do with core banking operations, unlike the approach Bridgeman appears to be proposing for the New Zealand bank subsidiaries.

A not unimportant word that one –   subsidiaries.  Presumably Bridgeman is fully aware, even though his article doesn’t mention, that all four Australian banks do the bulk of their New Zealand business not through branches, but through legally separate New Zealand subsidiary companies, with their own boards of directors (and statutory duties). (New Zealand compels them to do so, at least in respect of the retail business).

But when I read this paragraph I had to wonder if he really did appreciate that.

But if ever there was a time to raise the prospect of some form of domestic ownership and oversight of the banks, it is now.

The problem is it will never happen unless the Aussie banks are forced to by our politicians and regulators. After all, the last thing the banks want right now is another regulator to answer to.

Yet, why should it be accepted that four of this country’s five most profitable companies are effectively regulated in Australia?

The New Zealand subsidiaries are fully subject to New Zealand law: competition law, prudential regulation, financial conduct law, health and safety law.  The lot.  (Even the branches are subject to much New Zealand law, but leave them aside for now.)   The Reserve Bank of New Zealand sets minimum capital standards. minimum liquidity standards, disclosure requirements and so on.

Of course, since the New Zealand subsidiaries are part of much larger Australian-based banking groups, APRA’s regulations and requirements for the group can also be binding  –  not on the New Zealand business itself, but on the group as a whole.   APRA can, in effect, hold the local subsidiaries to higher requirements than those set by our Reserve Bank  (in just the same way that shareholders might voluntarily choose –  perhaps under rating agency pressure – higher standards than a regulator might impose), but it can’t undercut New Zealand standards for New Zealand operations.  Daft as they may be, New Zealand LVR restrictions are binding on banks operating in New Zealand.

Bridgeman goes on

Theoretically an Aussie bank could offload 25 per cent of the institution’s New Zealand assets and list the shares here separately. That would bring tax advantages to New Zealand investors who can’t use Australian franking credits, even though they are dual listed.

I presume he means selling off 25 per cent of the shares in the New Zealand subsidiary (rather than 25 per cent of the assets).  It would, no doubt, have tax advantages for New Zealand investors (and thus, in principle, the shares might command a higher price), and yet the banks haven’t regarded it as worth their while (value-maximising) to do so.    Bridgeman doesn’t look at question of why (presumably something about best capturing value for shareholders by holding all of the operations in both countries, and being able to  –  subject to legal restrictions and duties –  manage them together).

And he also doesn’t note that if, say, ANZ sold down 25 per cent of the shares in its New Zealand operation, the subsidiary will still be regarded by APRA as part of the wider banking group, and prudential standards will still apply to the group as a whole.  As they should –  after all, with a 75 per cent stake there would be a high expectation (from market, regulators and governments) of parental support in the event that something went wrong in New Zealand.

There is a suggestion that the article is a bit an advertorial for NZX

If a quarter of these assets were listed that would bring about $12.5b of capital to the local stock exchange – a badly needed injection at a time when the main market is shrinking.

But even then it isn’t clear what is meant.  It isn’t as if there is a new $12.5 billion (I haven’t checked his numbers) of local savings conjured up.   Buying one lot of shares would, presumably, mean selling some other assets.  In a country with quite low levels of foreign investment, the initial effect of any such floats would be to reduce that level further.  (Of course, in practice quite a few of the shares in any newly floated New Zealand subsidiaries would be picked up by foreign investment funds, leaving the alleged benefits of any compulsory selldowns even more elusive.)

Bridgeman ends with a rallying cry

And right now the Aussie banks are distracted with a battle on their home turf.

It’s the perfect time for some Coalition politicians to show some backbone and make a case for a change in this direction.

It might have appealed to Winston Peters once upon a time, but even if it weren’t a daft policy to start with, Bridgeman may have noticed that business confidence is at rather a low ebb right now.  Arbitrarily interfering in the private property rights of owners of private businesses – even if largely Australian ones –  wouldn’t be likely to do much to instill confidence in the soundness of policymaking.

As it is, they could start closer to home.  If governments really did want to focus on getting some more bank representation on the domestic stock exchange –  and it is not obvious why they would –  perhaps they could look at the New Zealand banks first.  After all, only one of them (Heartland) is sharemarket listed.  And the biggest of those New Zealand owned banks –  Kiwibank – is actually owned by the government itself.    In fact,  by three separate goverment agencies (NZ Post, ACC, and NZSF), none bringing obvious expertise to the business of retail banking, none themselves facing any effective market disciplines.  I’d be all in favour of a well-managed float of Kiwibank  (although once floated it might not last long as an independent entity).  There are good reasons (they’ve been there for years) for the government to consider seriously that option.  But there are no good reasons to force well-functioning locally regulated foreign-owned banks to sell down part of their operations in New Zealand.

 

31 thoughts on “Local listing for banks: a case for one in particular

  1. I personally think it’s a bad idea to force the banks into that.

    I’d rather have stricter rules regarding debt to income and more lending towards productivity.

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  2. Um, I thought all the Aussie banks are listed on our stock exchange: they show on the NZX main board if you want to buy or sell them: how is a dual listing any different to those companies being listed here?

    But that’s not what I wanted to say; rather a question (I believe originally posed by economist Paul Walker at University of Canterbury – but don’t hold me to that).

    Regarding the hysteria that erupts on dividends being repatriated to foreign banks etc, how correct is that. NZ is an island nation with it’s own currency; pretty much the only country you can spend NZDs is New Zealand. For Aussie bank head office to take NZ cash back to Australia is pointless, NZ dollars can’t be used there (or any other country in Asia, Europe, etc): to use the cash they have to exchange NZDs for AUDs, thus they need to find someone who wants to spend the same value of cash in the NZ economy to exchange with, thus, how has the money left NZ? It can’t surely: NZD, including from profits earned in NZD, have to be spent in NZ?

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    • You just exchange NZD for AUD at the prevailing exchange rate of the day when you suck cash dividends out of NZ. With the banks they will just exchange at the wholesale spot rate.

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      • Note that a profitable bank this current year is not necessarily a strong and stable bank the next year after dividends are distributed. Note that dividends strip out cash from the bank to be paid out to their shareholders being listed on the ASX(Australian Stock Exchange)

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      • Not necessarily. NZD exists on a digital screen and is traded internationally. Around $500 million to a billion NZD is traded every single day which is a trading volume of $200 billion to $360 billion a year. It is the 10th most traded currency in the world. NZ exports are around NZ$70 billion a year. There is a big demand for NZD around the world just merely held by traders.

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    • No.

      You earn $NZ100 picking raspberries in Nelson. You’re now off home to England and you want to spend your $100 in England, but, you have to find someone coming into the country – or on a digital screen, I don’t care – who wants to spend that $100 in New Zealand, so will swap you the equivalent value of pounds sterling: your $100 made in New Zealand will be spent, has to be, in New Zealand. If someone in France does the transaction digitally, that makes no difference: they still end up with NZ$100 that can only be spent, ultimately, on NZ goods or services.

      You confuse what really happens by trying to make it more complicated than it actually is.

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      • What you need to do is explain how that $100 left New Zealand? I have shown how it can only be spent on New Zealand goods and services – there’s nothing else you can do with NZDs.

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      • You can’t equate the amount of NZD as equal to the export demand of $70 billion. NZD is a high yield currency and there is demand for NZD by various banks and Central banks around the world whenever they try and hedge their currency positions. If you look at our own RBNZ balance sheet, it will show that it holds foreign currency of $27 billion through its various hedging activities. If you notice, the RBNZ does not pay salaries or buy strawberries with that $27 billion of foreign currency. They just hold it as a hedge. All the banks around the world would do just that and many would do that for all the various companies and individuals in their respective investment or hedging activities. None of that would be used to buy goods or services.

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      • At some stage very NZ dollar must be spent on goods and services, yes? Whether you save it for ten years first and deny immediate consumption, or it goes into a hedge fund for a year as part of a savings strategy, etc etc: every NZ dollar is ultimately spent on goods and services, that’s the purpose of money, and the only goods and services that can be bought with NZ dollars are New Zealand goods and services.

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      • No. not all currency have to be spent. You just have to get past the fact that it is about individuals. It also is about government institutions, central banks, local banks, companies and trusts that live into perpetuity. Goods and services are not required. You forget that NZD is like a product in its own right. If that product has a stable value with upwards potential, has a yield and there is a demand for it, people store it like gold but better than gold because it earns interest which gold does not.

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      • Well, I’m going to finally leave you at the point you believe a fiat currency has a stable value and some sort of yield in the age of negative interest rates 🙂 Problem with central banking and fiat money is over the last decade price discovery has been pretty much obliterated by the command economy. But now I’m off topic.

        Serious though, and finally, the purpose of money is the purchase of goods and services, trade, consumption, etc, including if you are a government. It doesn’t get shoved into savings accounts in perpetuity.

        But you won’t be convinced. That money does not leave New Zealand.

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      • So effectively you are saying that it is ok for non resident foreigners to own all property in NZ and all businesses in NZ where kiwis will just pay rent and just be employees. It does not matter that all non resident foreigners send all their profits overseas because none of it actually leaves the country?

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      • Yes. They can no more send profits offshore than they can take the land (which Kiwis can buy back) offshore. Notable the nationalism (and previously mercantilism) starting to creep into your posts.

        We are a very small economy; our entire population isn’t even a suburb in most US, European and Asian cities: we absolutely need foreign investment or our standard of living will drop. Are overseas interests going to own all land and all businesses, and all Kiwis are going to be employees? Of course not; that’s melodramatic nonsense and scare mongering. We have our own entrepreneurs, especially in rural sector and ownership, if you think that so important, will always be majority Kiwi.

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      • Correction: The NZD Not $1 billion a day being traded, more like $105 billion a day being traded.

        “The latest BIS study, which assesses data for April 2013, shows that the New Zealand dollar had an average turnover of US$105 billion a day.This makes it New Zealand’s largest financial instrument by a wide margin as non-repo NZ Government bonds had daily volume of $950 million during April and the New Zealand sharemarket $145 million. Thus, the kiwi had 131 times more daily volume than the non-repo NZ Government bond market and was 855 times greater than the NZX.

        As far as the global FX market is concerned, the BIS notes that there has been a significant increase in activity from US$3971 billion a day in 2010 to US$5345 billion a day.”

        https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11176031

        Given that NZ GDP is only $270 billion a year clearly trading of the NZD is actually at $105 billion a day really has got nothing to do with buying goods and services. 4.5 million people can’t run to the store and back home fast enough to generate that level of NZD turnover every single day.

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      • Riiight, so when you’re 65 you’re just going to burn the money in your Kiwisaver, not actually spend it on your retirement to buy goods and services. That’s a strange proposition.

        Go back a step: what do you think money is for?

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    • 🙂

      Irrelevant.

      Look, here, I’ll give you a NZ$100 note I earned here in NZ. It’s been in my savings, a hedge fund, for five years as I was planning to spend it only when I got to 65, but to prove a point, please, you take it. Now I want you to take that NZ$100 note out of the country, to England, say, and spend it over there so NZ Inc is denied it. Remember, you can’t exchange it for sterling, coz the person you exchange it with will only spend it here (it can’t be spent anywhere else), you have to take this NZ $100 note on the plane to England.

      When you get back report on what you bought with it.

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      • Of course you can buy stuff with your NZ$100 in London. Just go into any money exchange store and he will exchange it for you. That NZ$100 may never get back into NZ to buy anything. I did just that with Chinese Yuan on my 2 week holiday there just last month. I exchanged NZD$1000 at the Shanghai Airport in China and got 4,400 Yuan using my credit card. But then I found out that most of the stores there preferred WeChat digital money so unfortunately I had to rely on a friends WeChat account and paid her the 4,000 Yuan and kept 400 Yuan cash in my cash collection of currencies around the world book. That 400 Yuan will sit in my collectibles trophy and never gets spend.

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    • The minute you exchange it, the person you’ve given my NZ $100 note to has to spend it on New Zealand goods and services (be it tomorrow or 30 years time).

      When you exchanged your $1000 NZD for yuan, someone will have picked up that NZ$1000. Where can they now spend that? There’s only one country. It has to ultimately be spent in NZ, the only country where it is legal tender.

      I could normally do this all night, but it’s Friday, and I’m off to the bloke’s shed for drinks.

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      • There is an investment option, where you don’t spend on goods and services. 4 years ago I decided to join kiwisaver. 3% was deducted off my salary and 3% was deducted off my employers profit. That money which I would have spent now sits with the ANZ fund manager. Everyday, the earnings get accumulated I don’t spend it. My employer can’t spend it. There is now $60K invested and not spent. It is a balanced fund so 50% goes into a fixed deposit savings account. 50% goes into foreign listed shares. None of this is ever spent. It is invested and reinvested and exists on a computer screen.

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      • Riiight, so when you’re 65 you’re just going to burn the money in your Kiwisaver, not actually spend it on your retirement to buy goods and services. That’s a strange proposition.

        Go back a step: what do you think money is for?

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      • You do raise an interesting point however. NZD must be spent in NZ which means that all this speculative trading volume of NZD to the US$105 billion equivalent a day does point to a substantial volume of NZD being held somewhere by someone around the world. Given that no one has any trouble selling NZD then equally someone has no trouble sitting on NZD as an investment or to buy NZD. Trading volume is usually a representative or a percentage of a actual amount of NZD. How speculative is the NZD would depend on precisely what goods and services you could actually buy with your accumulated NZD. IF the entire GDP of NZ for goods and services is only $270 billion, then say a trillion NZD out in the market would make it a highly speculative currency. But if supposedly as a international trader I know that NZ has land and buildings of $1 trillion then I would take comfort that I could always buy up residential land and property.

        But now that there is a Foreign buyers ban on residential land and property then NZD becomes even more speculative not having the backing of being able to offload in a trillion dollars worth of NZ residential property. Good thing there is no foreign buyers ban on commercial property.

        The Labour government just made the NZD much more highly speculative and as a result much more volatile by actually introducing a Foreign buyers ban on existing $1 trillion dollars worth or residential property perhaps?

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  3. The Australian Banks have been around for a very long time. What changed was when they went on a takeover spree in the 1990’s and with the insurance acquisitions ventured into mortgage lending, an activity they weren’t particularly noted for in earlier times. In taking over MLC and NML and sweeping up a few others the landscape and power changed.

    The Australian and New Zealand parliaments let it happen without challenge. The aggregation of power was large. Don’t recall either the AU or NZ competition arms getting exercised. But there you go.

    Damage has been done. Bit late to bring out the whips

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    • Australian banks also control most of the $173 billion in Cash deposit savings which gives them a huge advantage in NZ over the competition banks that have none of that local savings and can’t use their parents balance sheet to lend against. This is an unfair monopoly power provided by the RBNZ provided to their buddies in the banks. Commerce Commission should pursue collusion by the RBNZ in not allowing competition.

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      • I meant to respond to this point when you made it yesterday. You are misinterpreting the Reserve Bank’s core funding requirement. It does not require banks to have local retail deposits, simply secure funding. A bank could, in principle, fund its entire balance sheet with long-term offshore wholesale funding (including money straight from the parent), but the operative word there is “long-term”, including with no early ability of the lender to recall payment.

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      • It is rather difficult for any company to borrow long term funding of $170 billion to be an effective competitor or even to ask anyone to inject $170 billion as capital in a small volume country like NZ. Therefore that is a barrier that prevent the chinese banks from competing which is in effect collusion to prevent effective competition.

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      • You were talking about the Chinese banks, which are among the largest in the world. NZ is a tiny economy by comparison. And to get effective competition (if it is lacking), you don’t need the same volume of funding as the existing banks have in total,, you just need a reasonably wodge of secure funding ($20bn would probably make a big difference) and a willingness to price agggressively. Do that and you will win lending business, and in time win deposit business to some extent too.

        (To be clear, I would not welcome such an approach on two counts:

        – banks attempting to grow their books rapidly tend to (a) find adverse selection at work (they get the worst loans, others wouldn’t make) and (b) tend to threaten the soundness of the financial system in the transition, and
        – the Chinese banks are arms of the PRC. Operating here on a small scale is fine, but on a larger scale it would become a political/national economic security issue.)

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      • A couple of days ago, Don Brash came on air and indicated that the Australian owned banks earn around 20% returns on Shareholders equity compared to the other competing banks which includes the Chinese banks which can only get around 10% returns on Shareholders equity and that is a good thing.

        Not sure if he was acting on behalf of the Australian owned banks because he sure did not do the Chinese bank he was being paid by and acting as a Chairman of, any favors by encouraging Australian bank monopoly and dominant profit.

        $20 billion injection of funds for a less than 10% return locked into a low volume country like NZ to pick a fight against $173 billion giants funded by the local NZ savers to derive a 20% return is like bringing a knife into a gunfight. Sure it is fierce competition like Don Brash suggested but anyone other than economists can see it is not a fair fight.

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  4. Why are you under the massively idiotic presumption that so called business journalists know the first thing about business?? Bridgeman and a total numpty…

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