By Martien Lubberink*
The Reserve Bank of New Zealand published its latest Financial Stability Report this week. Definitively laudable are the policy measures that it announces to tame the frothy Auckland property market.
However, the Reserve Bank presents a rather rosy view on the current state of NZ banks.
It appears to suggest that all is well with our banks. For example, it mentions that capital ratios are above regulatory minimum levels and that profitability has increased.
On both counts the Reserve Bank could have informed us differently.
Yes, capital ratios are above regulatory minimum levels. But the minimum levels are largely irrelevant.
The official Common Equity Tier 1 (CET1) requirement is 7% (the minimum 4.5% regulatory requirement plus the minimum 2.5% capital conservation buffer), and this is really the lower benchmark. Investors and regulators expect a CET1 ratio of at least 10%.
With a 10% benchmark in mind, the aggregate CET1 ratio of NZ banks of 10.7% fails to impress.
Moreover, the 10.7% is now clearly below the average European level, which stands at 12.1% for the largest European banks.
Also worrying is that capital ratios of NZ banks have declined for three of our five large banks, see Figure 5.2 from the Financial Stability Report below:
My more important worry is what happens with the profitability of NZ banks. The Reserve Bank mentions that profitability - measured by Return on Equity - has improved. This, for sure, is good news.
The problem is that the increased profitability appears to leak away. It does not translate into higher equity, which it normally should: firms use profits to increase equity.
So why is it that profits appear to leak away?
In order to understand this, I looked at ASB, the bank that has shown a dramatic decline in CET1 over the last five quarters, from 11.5% (March 2014) to 9.3% (March this year).
See the table below:
Profits increased, albeit slightly, but equity decreased (!) from $5.535 billion to $5.389 billion.
The table shows that ASB paid out its profits to help fund its owner, the Commonwealth Bank of Australia. This bank's profits have come under pressure recently.
Over the last five quarters, ASB paid $1.315 billion to its owner, whereas it made profits of only $1.047 billion.
The behaviour of ASB shows a key vulnerability of New Zealand banks; they may be used to prop up their Oz parents.
This is bad, because it may limit the ability to lend and that may affect the New Zealand economy.
(It should be noted that ASB issued Additional Tier 1 capital of $600 million, which weakens the structure of regulatory capital. This may have prompted the Reserve Bank to take another look at the requirements that govern the structure of regulatory bank capital).
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*Dr Martien Lubberink is an Associate Professor in the School of Accounting and Commercial Law at Victoria University. He has worked the the central bank of the Netherlands where he contributed to the development of new regulatory capital standards and regulatory capital disclosure standards for banks worldwide and for banks in Europe (Basel III and CRD IV respectively).
7 Comments
Over the last five quarters, ASB paid $1.315 billion to its owner, whereas it made profits of only $1.047 billion.
Is this ASB's version of: We have also diversified our funding sources enough to repay all the senior unsecured funding lent to us by our parent, National Australia Bank (NAB)," Duarte said?
I responded in kind:
I bet NAB demanded they do so in light of the draconian impact upon unsecured bank creditors post the institution of OBR - the parent company made sure they were not going to help re-capitalise the NZ branch in the event of insolvency. That is a task best left to the exposed depositors and local NZ unsecured note holders.
But I guess BNZ still funds mortgage assets with foreign wholesale loans, exempt from OBR pre-positioning, to extend the asset to liabiltiy ratio beyond the prudent 100% of local deposits - an update confirming this ratio is below the previously noted 140% level would offer some comfort to depositors. Read article
Exactly. I was shocked at the conclusion, shocked (not).
When a bank says:
"Your loan is up for renewal but we're a bit concerned about...and we really need a personal guarantee", it really means:
"Our parent bank is bankrupt but in order to not disturb the illusion that we are perfectly sound, we really need a personal guarantee"
Bankers just understand bank finance so very much better than academics. They can easily afford the very best and brightest.
People seem to be worried about the Chinese buying our farms, but that horse bolted long ago. The Aussies bought our banks long ago and have been farming us very succesfully ever since, to the tune of about $1000 a head per annum by my rough calculation.
NZ house prices reached a record low in Jan 2011.
http://www.tradingeconomics.com/new-zealand/housing-index
But the RBNZ don't want declining prices!
So the RBNZ set to a task to make people spend their money.
RBNZ introduce OBR policy 2012
http://www.rbnz.govt.nz/regulation_and_supervision/banks/policy/4430900…
And all those people who have saved money think stuff this OBR thing!! I'm not leaving my money in the bank.
House price inflation escalates
http://www.google.co.nz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0C…
Then the RBNZ starts panicking at how the people are investing in housing but there's this irksome persistent issue of the inflation parameters that won't go away and they can't pull the OCR lever to tame the beast they created....
http://www.tradingeconomics.com/new-zealand/inflation-cpi
Wheeler says to Spencer......There's a lot of straw in this stable......don't shit in the same corner twice!!
Their Aussie parents need the money.
Australian households are the most indebted in the world, according to research by Barclays, which warns that the country would be vulnerable in the event of another global financial shock.
Barclays chief economist for Australia Kieran Davies says private sector debt-to-income gearing is currently at an all-time high of 206 per cent, up from a pre-global financial crisis (GFC) level of 191 per cent. This put Australia just within the top 25 per cent of the world when it comes to leverage.
However, when it comes to household debt - which includes mortgages, credit cards, overdrafts and personal loans - Australia leads the global field, according to Mr Davies, with credit continuing to pile up while the rest of the developed world is paying it down.
http://www.smh.com.au/business/the-economy/australian-households-awash-…
Australia’s Personal Debt Reported As Highest In The World
The Reserve Bank of Australia or the RBA has determined that most of the debt Australians carry is for mortgages, loans and credit cards. These debts are over $1 trillion AUD. This equals to $56,000 US dollars for every Australian adult. The average American adult has about $45,000 US dollars worth of debt.
http://www.creditcardfinder.com.au/australias-personal-debt-reported-as…
The unique (in the world) OBR scheme implemented by the RBNZ puts NZ depositors in NZ banks at increased risk - without any transparent information on which bank is most likely to fail. If OBR is invoked it will prove to be the worst 'ambulance at the bottom of the cliff' pre-positioning imaginable.
On the other hand, nearly 150,000 of the better performing NZ residential mortgages are in the covered bond pool - collateral for overseas lenders and excluded from the OBR. These overseas lenders will not lose - whereas NZ depositors will potentially take huge haircuts to benefit these lenders and the Aussie parent banks.
At the least, RBNZ should require the phase out of the so called 'covered bonds'.
Also the RBNZ should require larger provisions for bad debts by the NZ banking system, and larger retention of their profits within NZ.
Otherwise the RBNZ will be directly responsible for the unintended consequences of their current unique approach to banking stability.
Rampant migration not only depresses the receiving nations wages but has deleterious effects on productivity, lower interest rates and burgeoning debt too. See the BBC's Robert Peston: http://www.bbc.com/news/business-32739852
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