Would buying BNZ actually help New Zealanders?

Source: Radio New Zealand

New Zealand First might want the government to buy back BNZ and meld it with Kiwibank to create a banking competitor to take on the Australian big banks – but there’s limited evidence that it would work.

NZ First leader Winston Peters said at the weekend that the decision to sell the bank in the 1990s was a disgrace.

The bank encountered problems in the 1980s when it expanded into corporate lending after market deregulation.

The Crown coughed up not once ($634 million) but twice ($720m, with the help of another investor) to save it, before it was eventually sold to National Australia Bank, which still owns it.

Speaking at a campaign event at the Trusts Arena in West Auckland, Peters said the new entity – to be known as “National Bank of New Zealand” – would be commercially run and designed to compete more aggressively with the major Australian-owned banks operating in New Zealand.

He estimated buying the bank would cost “$7.5 billion upwards”.

Government-owned Kiwibank has struggled to have an impact in the sector and has been described as a “one-armed boxer” hampered by a lack of capital.

University of Auckland emeritus professor Tim Hazledine said improving banking competition was a worthwhile goal but reducing the number of major brands was unlikely to achieve it.

“Rather than buying back the Bank of New Zealand and merging it with Kiwibank, the government should use its ownership of Kiwibank to position it as a ‘fighting brand’ and reduce interest rate margins,” he said.

“That could put pressure on the big four Australian-owned banks to follow suit.”

Sam Stubbs, founder of Simplicity, said purchasing BNZ would require a willing seller.

“There isn’t one there. That means the price is likely to be high which will limit the ability of the bank to offer cheaper mortgages and higher term deposits. Even if it did work and demand grew, the government of the day would need to spend more taxpayer money to expand, we need that money spent on hospitals.”

He said he could understand a desire to go back to the “good old days” of state-owned banks.

“But I suspect a better and much cheaper for the taxpayer way to achieve the same thing is for Kiwibank to be renamed the National Bank of NZ and listed with only NZ shareholders and let KiwiSaver funds provide the billions required to make it a serious, publicly owned bank.

“Public ownership does not have to mean government ownership. If only New Zealand investors can own shares a listed Kiwibank would be publicly owned, we would be selling the family silver to the family.”

Other sectors in which the government has a strong ownership stake include power – where it owns 51 percent of three of the country’s four major electricity gentailers – and airlines, where it owns 51 percent of Air New Zealand, have their own challenges.

The government bought back KiwiRail in July 2008.

University of Auckland senior finance lecturer Gertjan Verdickt said there was “ample” evidence that NZ First’s plan was not a good idea.

“I have an entire paper on the railway industry in the 1930s: we show that governments are more likely to give money to politically connected railways, not those in economic need.

“Interestingly enough, it doesn’t change profitability, you see employment growth down, but wages of current employees go up. In other words, it doesn’t help the railway, it helps employees, especially the c suite. Also, the chances of those railways going bankrupt actually goes up. So, all in all, bad idea.”

He said there had also been an international study looking at how government ownership and involvement in a banking system affected performance between 1989 and 2004.

“They uncover an interesting pattern of changing performance differences between state-owned and privately-owned banks around the Asian financial crisis. They find that state-owned banks operated less profitably, held less core capital, and had greater credit risk than privately-owned banks prior to 2001. Again – troubles in paradise.”

He said there was some evidence that consumers would benefit if a Government bought a bank. After a bailout, there were lower loan spreads, longer maturities for loans and less collateral held.

“Overall lending goes up but if you see which type of lending, it is politically driven. This to me doesn’t outweigh the risks.”

Kōura founder Rupert Carlyon said in the energy market, the companies had underinvested in generation to keep prices high.

“It is also telling that the government couldn’t put money into KiwiBank and then the private sector were unwilling to, due to its low profitability.

“Let’s figure out where the problems lie and then we can go from there. In my mind, really good regulation is needed and solves the problems.”

He said it would help to have good regulation requiring banks to minimise costs for customers, such as with an annual review of customers’ accounts to ensure they were set up efficiently, and an annual fee letter setting out what fees, interest payments and other relevant sources of revenue applied so customers could compare what they were paying to what they would be charged at other banks.

“Around small business lending and risk appetite, I am not sure there is a huge amount that can be done here – this is the one place where increased competition would be very helpful but we need to let banks set their own risk appetite. SME banking is the issue here. But the government owning BNZ and telling them to relax their credit criteria is not the answer either. Maybe the answer is that we need to instruct KiwiBank to focus primarily on SME banking and give up on corporate and retail banking.”

Kernel founder Dean Anderson also said there was no evidence.

“I think the commentary on government intervention and forced acquisitions raises serious concerns for investors and global relations. Maybe too much time in the Trump sphere.”

Sign up for Money with Susan Edmunds, a weekly newsletter covering all the things that affect how we make and spend money

– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand