The contest between business leaders and their bankers is always something of grudge match – more so if they are playing with one of our four largest Australian-owned banks. The tension heightened when the GFC hit and Kiwi managers felt the keen edge of their bank’s credit-slasher. In many cases, the umbilical cash cord was severed completely.
But on one thing most New Zealand business leaders and banking experts, including Reserve Bank governor Dr Alan Bollard, economists and government officials agree – things could have been much worse if our major trading banks hadn’t been Australian owned.
“Kiwi businesses know that if they had not been banked by the Australians they would have suffered far more during the GFC,” says Business New Zealand chief executive Phil O’Reilly. “My members say, ‘thank god for the bastard Aussie banks’.”
New Zealand business took hammering from the GFC. Banks closed the doors on record numbers of over-lent companies – many of which had generations-long banker/client relationships. The savage funding claw-back orders issued by the banks’ credit offices in Sydney and Melbourne killed companies, destroyed individual wealth and forced thousands out of work. Even bank employees jumped ship, unable to cope with the Jekyll to Hyde personality transition demanded of them.
Australian banks had, throughout the 1990s and early 2000s, stuck to their conservative plain and purl pattern of lending. Unlike their American and many European counterparts, they gave investment banking, derivatives and other speculative financial products miss. When the crunch came, ANZ National, ASB, Bank of New Zealand and Westpac hardly dropped stitch, comparatively speaking, thanks to the backing of their reasonably well provisioned parent banks across the Tasman.
So while the past three years have been tough for business, the Australian banks’ conservative management and lending policies meant they could, as O’Reilly puts it, “tow more Kiwi companies through the storm” than would otherwise have been the case.
It was not, however, always plain sailing. According to Bollard, the Australian banks “sometimes wanted to retrench resources” more than would have been healthy for the New Zealand market. So much so that the Reserve Bank insisted on some “local incorporation and outsourcing requirement to better deal with stress events” such as the GFC (see The Director – NZ Management May). But Bollard agrees that Australian and therefore New Zealand banks, were better equipped to handle the GFC than Northern Hemisphere banks.
Deeper difficulties
That said, at least two of the four major New Zealand banks found themselves in deeper funding difficulties in 2008 than others. It is difficult to know whether their desperate cash shortage was created by their Australian head offices’ decisions to withhold additional capital because of their negative feelings about the state of the New Zealand economy, or because of their group’s inability to source additional funds. Either way, it resulted in some New Zealand companies having tougher time than others as they struggled to meet implacable loan repayment demands.
Dr David Tripe, director of Massey University’s Centre for Banking Studies, agrees that Australian ownership of our banks was fortuitous. On the other hand, the GFC effectively spotlighted New Zealand’s underperforming business sector for the banks’ head offices back in Australia.
He thinks Australian bank head offices are now questioning whether to throw more capital at their New Zealand franchises. The danger for New Zealand business is that their more critical look will see us as long-term, non-performing market.
Tripe is convinced Australia’s big four banks – the Commonwealth Bank of Australia, Westpac, ANZ and the National Australia Bank – are “looking carefully” at New Zealand’s economic and business prospects. “And I have to say that our likely [economic] performance in the short to medium run does not look especially good,” he says.
Auckland-based financial analyst and business writer Brian Gaynor recently wrote that Australia’s banks were “creaming it” through the profitability of their New Zealand operations. The four New Zealand banks reported total net earnings of $1.39 billion for the first half of the 2011 financial year, 48 percent increase over the same period in 2010. But, says Tripe, the banks will be taking much longer term view and their decisions will determine their attitudes toward supporting New Zealand business. They might continue to claw back dividends without advancing much in the way of development capital.
Auckland-based lawyer, turned banker, turned lawyer again, John Waugh, now gives businesses, both large and small, specialist funding advice. He has worked at senior management level in both New Zealand and Australian banks. He is inclined to agree with Tripe.
Short drive
The banks are, in Waugh’s opinion, looking at both the state of the New Zealand economy and the country’s historical inability to grow its businesses. “There is,” he says “a lack of drive and willingness to build companies beyond their capacity to deliver comfortable lifestyle for the owners.”
That approach does not impress the more aggressive strategists and risk analysts that populate the banks’ head offices. “The psyches are different,” he says. “The Australian psyche is more robust than the Kiwi’s. They are more Irish and Italian. We are Scottish and Presbyterian.”
The observation might account for Waugh’s feeling that New Zealand business must now convince the Australian banks that they can manage their operations more professionally, that they can grow them and, through that lift in their individual performance, help build significantly stronger economy.
There are other reasons why Australia’s banks are looking more carefully at New Zealand. They are not, for example, impressed by the low standard of corporate governance in New Zealand. And they are somewhat contemptuous of successive government’s milksop approach to beefing up statutory financial rules and regulations.
“Australia has much better corporate governance,” says Waugh, who at one stage headed CBA in Queensland. “Regulators such as the Australian Prudential Regulation Authority (APRA) and the Australian Securities & Investments Commission (ASIC) have real teeth. If you cock-up in governance over there you go to jail.”
Australia’s big four all now rank in the world’s top 50 by market capitalisation. They were hardly on the radar before the GFC. There is now an ambition to take on the world.
What turned their fortunes around? The GFC. Australia’s banks were able to capitalise on the crisis because they were prudent and well managed, says Waugh. “Their capital structures were sound, they managed their risk, provisioned properly, were transparent and they were tough.” They taught the world lesson about smart banking.
Bolstered by the new-found confidence, would Australia’s banks like to quit their New Zealand operations? “Probably,” say both Tripe and Waugh. But only if the offer was right. That, of course, is the rub. As Tripe says: “What international bank would buy New Zealand bank in preference to its Australian parent?”
Do Australian banks really have low opinion of New Zealand’s future economic prospects? If they do, they are not saying it publicly. And the advertising and marketing campaigns talk about supporting local businesses to grow. But as industry insiders note, marketing and advertising campaigns have little to do with anything real, particularly when it comes to internal bank management.
The risk factor
Well, do they see Kiwi businesses as bad risk investments? O’Reilly doesn’t think so. He accepts that the relationship between banks and business soured when the GFC hit. “Businesses were shocked when credit dried up,” he says. “Many of them blamed the banks, but there was blame on both sides.”
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