By Gareth Vaughan
The big four Australian banks should be required to list 25% stakes in their New Zealand subsidiaries on the NZX, a leading fund manager says.
Devon Funds Management executive chairman Paul Glass says it's right that New Zealanders are debating the merits of foreign ownership of land and houses. But, he says, no other advanced economy in the world would allow almost all its banking system to be foreign owned.
"The big four banks in NZ, which are all Australian owned, have a combined market share of about 90% and will make combined after tax profits out of NZ of more than $4.5 billion in 2015. To put that in context, if you add up the profits of all the companies listed on the NZ Stock Exchange you get to a similar number," Glass says in an article in Devon's latest monthly report.
"The big four banking oligopoly is so profitable that in NZ in 2014 they generated a pre-tax return on equity of more than 22% for their Australian shareholders. Given the banks are effectively NZ Government guaranteed, this represents an exceptionally attractive return, particularly relative to the current risk-free rate of about 3.5%. The NZ taxpayer, represented by the Government, effectively guaranteed the foreign-owned banks - interesting, isn't it?"
Glass notes NZ's current account has been in deficit since 1973 with banks a big contributor to the deficits.
"All other developed sovereign nations have taken the view that it's important to have domestic ownership of the majority of the banking system, particularly in the event of a severe financial crisis," says Glass.
Addressing what NZ could do about the situation Glass suggests we could require the big four banks - ANZ, ASB's parent Commonwealth Bank of Australia, BNZ's parent National Australia Bank, and Westpac - to list 25% per cent of their NZ operations on the NZX over the next 10 years.
"The amount of capital needed would be about $20 billion, but spread over 10 years would be manageable," Glass suggests.
'The timing is right'
Glass goes on to say the timing is right because NZ now has a solid regulatory regime under the Reserve Bank and Financial Markets Authority, KiwiSaver is transforming our savings base with more than $27 billion in KiwiSaver and growing strongly with this money in need of attractive investment opportunities. Furthermore the NZ sharemarket has grown and is now capitalised at about $100 billion.
"Consequently the new listed bank stocks would comprise a manageable 20% of the market, compared to about 30% of the Australian Index," says Glass.
Additionally, the NZ sharemarket is now trading at a price to earnings multiple premium to the Australian market meaning Australian bank shareholders wouldn't have to take a hit on valuation.
"Transparency is increasingly important and a stock exchange listing helps provide this. Stakeholders will have a much clearer idea about leverage, taxation and transfer pricing issues following partial listing. If, as a possible consequence of the economic cycle or new capital regulation rules, the banks needed to raise more equity, this is now possible through the NZ Stock Exchange given our improved liquid savings pool," says Glass.
"The banks are a big part of our economy and NZ-based investors should be able to access their NZ businesses, particularly through KiwiSaver."
Glass also points out NZ shareholders could benefit from the imputation credits generated from tax paid in NZ.
"Currently, if a New Zealander buys shares in an Australian bank the franking credits have no value. The NZ market is hungry for yield and banks generate great dividends. Investing directly into Australian banks is a different risk exposure to buying shares in their NZ operations, which typically account for less than 15% of overall group profits. I think it is in the banks' long-term interest to be listed here and be part of KiwiSaver schemes, as it will reduce the risk of their high profits becoming more regulated," says Glass.
EY's Wheeler chimes in, ANZ's Hisco does too
In terms of the tax issues, Glass' comments are similar to those raised in a previous interest.co.nz article by EY partner Brad Wheeler. Wheeler suggested New Zealanders should be "demanding the opportunity" to buy shares directly in the local operations of our Australian owned banks.
"Given the Australian government’s reluctance to move on trans-Tasman tax reform, thus failing to allow New Zealand investors in Australian companies credit for tax paid in Australia, it’s not sufficient to tell these investors they should be satisfied with shareholdings in the Australian banking parents, as some commentators have done," Wheeler wrote.
"Because New Zealanders can’t use Australian franking credits, it is not tax-efficient for them to invest in Australian-owned banks, even those which are dual-listed in Australia and New Zealand," Wheeler added.
And sharemarket listings could also raise cleaner capital for the banks than the hybrid securities issues targeted at retail investors that the Financial Markets Authority has warned aren't actually suitable for many investors.
Although rumours do the rounds from time to time suggesting one of the big four banks is considering listing a chunk of its NZ subsidiary on the NZX, nothing firm has yet materialised on this front.
In an interview after ANZ's recent half-year financial results, I asked ANZ NZ CEO David Hisco about the idea of a partial float of ANZ NZ.
"I think people like to raise this, particularly investment bankers," Hisco said. "But I think it wouldn't be without its difficulties and there's probably easier ways to raise capital actually."
Asked to elaborate on the latter point Hisco said: "In terms of how you would manage it for example. And it just creates more complexity. So well you get some capital, it comes at a price. It is one option but certainly from where we sit it's not on the table for us."
Here's the full Devon article.
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29 Comments
Glass notes NZ's current account has been in deficit since 1973 with banks a big contributor to the deficits.
Our Australian banks may rape borrowers and savers alike to repatriate significant unwarranted NZD profits off an inadequate capital base, but they act as a rated conduit to borrow offshore foreign wholesale funds to finance said persistent, but nonetheless expedient, accumulating C/A deficits.
Maybe it's a stealth wealth transfer operation proposal - it's been said the Aussie bank parents are past their best days and need to recapitalise to meet stringent regulatory demands - what better way than to dump an overvalued industry beyond it's peak payout state on gullible Kiwis and transfer the IPO proceeds back to Australia as well.
Citi is forecasting tougher times ahead for the big four, with earnings-per-share growth to decline to "virtually zero" as the banks grow their share counts. Citi also expects the banks' return on equity to fall from 16 per cent to 13 per cent within three years, bringing forward its longer-term version of returns falling to below 12 per cent by 2020. Read more
Finally someone realises the Aussie banks already own the country. I've been wondering for years why the RBNZ doesn't make them list their NZ subsidiaries. People worry about selling third rate dairy farms to "foreigners" but the Aussies have taken the good stuff years ago. We are a nation of debt serfs kept in thrall by the temptation to "own" our own house, but at a price we can never repay.
4.5 biliion profit is $1000 profit for each and every person in New Zealand. Man woman and child. You are a family with two parents and three under ten. It's five grand. For a relatively straightforward business. There is no question - we are being ripped off in spectacular ways.
KH surely thats a joke comment but it didn't come across that way - they finance 90% of the assets we borrow against so that $1,000 per person says alot about us, not them. Do you not want someone to provide finance to fund activity, especially in a country where we seem incapable of saving ? The corner dairy that only makes $100 a year off me is not "ripping me off" in comparison.
When, despite a downturn and 6+ years of a stuttering economy SME's struggling etc the banks profits remain as good as ever (or better) you have to question wtf is going on. Then consider that the banks and indeed others seem to be playing the moral hazard game at tax payers expense, hmmm is all I can say.
In terms of saving, while I tend to agree, a) many ppl are struggling to even pay bills driven higher by "privatisation" let alone save, b) we see that depositors are getting extremely low rates, c) What money there is is leveraged and thrown into crazy property speculation to gamble on making a "profit" rather than real business endeavors. Yes sure "we all" have excessive debt buying non-profit making consumer toys marketeers have convinced us we need. Simple banks are monopolies and the financial industry seems mostly parasitic and needs to be severely shrunk.
Meanwhile essential services like health struggle as "we" dont want to spend more money on tax to support them (and indeed expect tax cuts used to buy yet more property and consumer toys with) as we are stupid enough to believe the pollies that the public system can be made more efficient and effective by selling it to others for peanuts, or are left to crumble.
Personally I think many ppl are simply too self-centred and f****d in the head to think this silly game can continue.
Grant - you make it sound as if the banks are generously lending their hard earned dollars to us. They're not, they're at best a middle-man and at worst using the fractional reserve system to lend us imaginary dollars, with rip-off levels of interest giving them these absurd profits.
What I do is beside the point. My reply was a criticism of Grant's comments.
Of course we're welcome to use Kiwibank. The problem is these Aussie banks already had their fangs deep into our economy before Kiwibank existed. Extracting them is something only the government and reserve bank can do.
Why would we "extract them from the economy"? If it wasn't for foreign banks and the competition/economies of scale that they provide we would pay much more for our financial services. If we remove them there would be an article in a few years time titled "why are we paying so much for FS..."
If your very worried about dividends being paid to Aussie parents you can simply start banking with a Kiwi bank so your money doesn't go off shore. And buy shares on the ASX in CBA, etc then send your dividends back here so AUD profits are coming here...
Steven... Do u think a Bank is just another business..???.
Selling our Banks to Foreigners is probably the dumbest thing that NZ has ever done.... In our debt/Ca[capitalism system Banks/Banking system is the heart and blood of an economy...
It is a public/private arrangement ..( Central Banks/ Private Banks)..
Only a dumbarse Govt. would allow the Private Banking system to be sold/owned offshore..
AND....I believe in free mkt principles....
NZ will ALWAYS have current acct deficits... ( foreign owned banking system + our appetite for debt, assures that )
Just my view ...
Be aware even the Aussies don't own all of their 'Big Four" banks and profits are heading way offshore:
http://www.wakeupkiwi.com/downloadpaper/wakeupkiwi_newzealandandworldba…
the rbnz wiped a $15b finance industry owned largely by mum and dad investors. these could have been listed. over time they would have consolidated and reached a critical mass. the rbnz actions decimated a huge amount of wealth - particularly retirees who could least afford it through its actions. those well run businesses are now privately run and expanding, and now funded by the banks. where ultimately the returns end up. whats more is a large part of the risky end of development ie mez is no longer there or more risk finishes up on the banks balance sheet. the result is the banks are carrying more risk now, unsecured personal loans, a lot which are in default. more mez risk. inflated property prices because there risk complienace is too conservative, and they dont traditionallly like risk products. are slow to act. they are all the sm. meanwhile all the returns are heading offshore. throw in the fact that depsoitors are not guranateed by the golvernment, covered bond issue, and farnkly nz "safe as houses" banks are not as safe as they once were. as the banks move down they risk profile they are also finding more fraud - although the banks / regulators wont use this term as it is un pc. the upshot is a number are contributing to a fraud dBase
all this adds up to a risk premium which should be being passed on to depositors - and its not
I know very few people who have made money in the west outside of capital gain on Houses and Farms. The economy has become focused on those areas because it's where the money has been made. Lets go back to the values of assets as recently as year 2000 and see how much money magically evaporates from those who think they are clever investors.
I often talk to friends in the farming community, who openly admit that their farming businesses generate very poor returns, mostly just enough to cover costs and give them a basic wage. All their wealth and in many cases it's substantial ,has come from increasing property values, without those increases their lives would be very different indeed.
We now live in an economy full of baby boomers, in most cases ,all their wealth has come from increases in asset values. This is because for years and years asset appreciation has been way ahead of inflation and every body has loved it, or at least those with skin in the game, it's been an easy game with no work required.
The question we need to ask is, ' how long can you run an economy where the best investment is in poorly returning assets creating no real wealth'?
Eventually we can no longer fund the debt that has been required to keep the assets inflating. I think thats why interest rates have to fall, but that in turn destroys our productive sector as investment with low cost of money ,(ZIRP) overproduces like we are seeing in dairy.
Eventually economies like Canada and Australia will be forced to print, anything but face the reality of just how much of our wealth we really own.
The banks are happy to be along for the ride, just look at their profits.
Eventually it's all going to come tumbling down.
Inflating the money supply is the only way to prevent our economies from drowning in debt. This inflation is a huge wealth transfer -theft-, from those of us holding money to those who get first dibs on the newly created money. Houses are a tangible and safe asset so a good place to store the value of rapidly devaluing money.
It will come tumbling down eventually, but it will be the 99%ers that suffer. The 1% will own everything of real value.
In the end, assets - be they shares, property or gold, are worth - everything, and nothing. Once asset owners are reluctant to swap what they 'own' for another person's cash ( or more likely debt), then they hold on to them. But being asset rich/cash poor, they need to sell something, anything to survive. Progressively assets are reluctantly given up at ever falling prices, as the market is all reluctant sellers ( to live) and no buyers, (they need to live as well and either have exhausted their cash reserves or their debt limits and can't buy.). Banks stop lending - completely - as statutory ratios are blown to pieces, and non-performing loans haunt their Board Rooms conversations. It's happened before, and will happen again.....
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