Liam Dann: NZ economy a good bet? You can bank on it

OPINION:

I suspect there would a have been few smiles around the offices of the Reserve Bank on Thursday morning, and not just because New Zealand’s central bankers are keen cricket fans.

News that Westpac has backed down from its threat to sell out of the New Zealand business is something of a moral victory for the Reserve Bank.

It confirms what we always suspected.

New Zealand’s banking sector is highly profitable and will continue to be even as the Reserve Bank lifts the level of capital that banks are required to hold over the next eight years.

The decision not to sell effectively ends a conflict over banking regulation that – in simpler pre-Covid times – was considered a battle of national significance.

It’s funny how a global pandemic puts everything else in a slightly less dramatic perspective.

At issue was how much risk banks should be allowed to take in this country.

The Reserve Bank decreed that local trading banks would be required to hold more capital relative to how much they lend.

The banks didn’t like that. The Australians who control our banks especially didn’t like it.

They, with support from some of New Zealand’s most laissez-faire commentators, warned that the moves were excessive, would force banks to raise margins, pushing interest rates up and ruining the economy.

Reserve Bank Governor Adrian Orr copped a lot of personal flak in what now looks like a politically motivated beat-up of a debate.

The Aussie banks warned that the move would reduce profits to the point that they might pack their bags and sell out of New Zealand.

Back in 2019 it was bosses at National Australia Bank (which owns BNZ here) and ANZ who were most aggressive.

But because they had more immediate need to address structural business issues it was Westpac that moved first on the threat.

Westpac Group has been running a strategy to refocus on banking domestically and exit a number of businesses and geographies with the aim of enhancing returns.

It has consolidated its Asian business and so New Zealand was next on the block.

In March it announced it was reviewing ownership of its New Zealand business.

At the time it specifically mentioned the changing capital requirements as a reason for the review.

On Thursday morning Westpac issued a market statement indicating that it was maintaining the status quo.

It didn’t mention capital requirements this time. It kept the communications short, saying a move wasn’t financially advantageous to shareholders.

No doubt there were myriad complicated reasons why selling out didn’t make sense.

But fundamentally the review assessed the value of the business now and in the foreseeable future.

The bottom line is that there isn’t anything better that Westpac’s advisers could think to do with the money they’d have reaped from a sale.

Where else would shareholders expect to get a better return on their investment right now?

Certainly not in a bank account.

For those with a high-risk appetite there’s money being made in everything from cryptocurrencies and digital art to limited-edition sneakers and antique Lego sets.

But for a safe, sensible, high-yielding investment, banks remain hard to beat.

Local banks made $1.643 billion in the March quarter – a new record profit for a quarter according to analysis by KPMG as part of its Financial Institutions Performance Survey report.

To be fair, the figure was bolstered by the unwinding of provisions for bad debt – made last year when we all thought Covid would cause an economic meltdown.

The economy stayed strong, people didn’t default on their mortgages so now the accounts have been straightened up.

But that strength just underscores the value and security that comes with owning a bank in this country.

In the towers of Shortland Street, Westpac’s decision was met with outright disappointment.

Those involved in the local capital markets have made no secret of their enthusiasm for the sale of one or even two of the Australian banks.

That open enthusiasm has rather undermined any political leverage Aussie threats to sell might have had.

If Westpac had decided to sell down its New Zealand operation, the most likely outcome was that it would have been listed on the New Zealand stock exchange, giving the local industry an enormous boost.

I rather liked the idea of Kiwibank taking a major stake and merging its way to a partially listed state-owned enterprise with scale to rival the other three big Aussie players.

But that was always a stretch – particularly given this government’s attitude to privatising anything.

I suppose the other big banks could still look at selling – but the experts say that’s unlikely.

Citi Research in Sydney says Westpac’s judgement call is likely indicative of the thinking among its peers and so it believes “the issue of divesting NZ subsidiaries has now been put to bed”.

Hey, what about those rising interest rates you might well ask?

Well, yes, they will probably rise. They are expected to regardless of the capital changes.

The Reserve Bank estimates capital requirement could lift rates by 20 basis points (0.2 per cent).

Other economists believe it will be more like 30-60 basis points.

But let’s keep it in perspective.

Increases in capital will be phased in over a seven-year period, starting from July 2022.

In the grand scheme of inflation, taxes, market volatility and geo-political turmoil we can expect between now and 2029 – this issue won’t even register.

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