A fair go, mate!

IF YOU borrow money from the bank, it holds a grip (‘death pledge’) over you.

And the bank is not in it primarily for their fun or your enjoyment, despite what its advertising schmooze says.

The shareholders in the big-four Australian banks, ie the parents of their NZ subsidiaries, get a dividend yield averaging 6.10% (source Morningstar). And those parent banks make a return on equity (RoE) averaging 12.84%.

But wait! The Australians’ subsidiary banks in NZ — ASB, Westpac, ANZ and BNZ — are reckoned to average 14-15% RoE.

The Australian Royal Commission looked at banking scandals there and told the banks, ‘Clean up your act!’ So they’ll be wanting their NZ subsidiaries to continue strip-mining every available cent out of their Kiwi customers — while they close the high street branches.

If the bank is ANZ it’ll be needing extra cash to cover its embarassing real estate dealing in Auckland, and to tidy up after the Ross Asset Management Ltd ponzi scheme, over which it now faces a class action lawsuit by Ross’s victims.

Do such banks have an enshrined right to 14-15% returns on equity — out of New Zealand? Ponder the question at 4am in the dairy shed or the lambing paddock, or on hearing the bank has devalued your farm by 25%, or that your loan is called in and it’s all over.

Then listen to the governor of the Reserve Bank of New Zealand (RBNZ), Adrian Orr. Why, he asked, are Australian owned NZ banks are so profitable relative to their parent banks. He told newsroom.co.nz that these NZ banks are “among the world’s most profitable — second highest in the world”. That’s pleasing, said Orr, “we want profitable banks… but why so profitable relative to others, in particular their parent banks?” he mused.

The obvious answer to Orr’s question is that, in a world of growing opportunism by the increasingly powerful, the banks behave this way simply because they may — subject to rules, of course… of course… of course.  

Governor Orr made these key points (the quotes are his):

First, these banks have low costs, by “significant gaps in operational capability” (read ‘closing branches’). They should reinvest to manage risks “and be better concerned for customers in the long term,” said Orr. And they should “reinvest more rather than pay dividends”, despite having to expect a decline in RoE.

Second, the banks are grumpy that RBNZ sees them as undercapitalised re the peculiar risks of NZ, ie “the nature of the economy and the concentration of the banking system”. And the banks resent RBNZ’s proposal that they hold more capital to deal with ‘disasters’ — although no more than many other countries’ banks, Orr insists. And the banks would benefit from lower risk in return for a slightly lower RoE (to about 10-11%), he says.

Third, re NZ farms, “for 10 years the banks have been over-lending… and now they’re somehow wanting to withdraw,” Orr said. “But they need to be there in good times and bad… so they’re [now] learning how to be good citizens of New Zealand.”

Many Kiwis could do two things in response.

First, keenly scrutinise and question all debt — for lifestyle, mortgaged property (buying the farm next door?), for the proper advancement of a business, and for the less proper thrill of wild speculation.

Second, you know those NZ banks, among them Kiwibank, Co-op Bank, TSB Bank and Heartland? You could shift at least some of your business there.

Lots of Kiwis still believe a fair go is still a fair go, regardless of how that works in the Western Isles.