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.