The Australian-owned banks operating in New Zealand are in a bind.
Australian regulator APRA wants them to limit their capital exposure to their Kiwi subsidiaries. But over here the Reserve Bank looks almost certain to order those same subsidiaries to increase the amount of capital they hold.
ANZ and Westpac (plus BNZ’s parent NAB) are caught between the two regulators and will have to make some tough choices. That may mean job losses and closure of some operations.
And, if the banks choose to divest, foreign hedge funds are already sniffing around to see if they can pick up portfolios of loans to New Zealand customers for a good price.
Something’s got to give
The banks were already warning of fallout from the RBNZ’s proposed capital reviews. The CEO of ANZ Group – which would be hardest hit by the proposed changes – said in a submission to the RBNZ earlier this year that the bank would need to “review the size, nature and operations” of its New Zealand business.
APRA’s proposed revisions of prudential standards announced last week have made drastic measures more likely.
Analysts say the Australian bank sector will have to find up to A$13 billion more in capital. Macquarie Wealth Management analysts are reported as saying the consequences of the APRA proposals for ANZ and Westpac, in particular, are worse than initially expected.
The impact on NAB from the APRA changes is expected to be negligible, but it is exposed to the RBNZ’s proposed changes through its subsidiary, BNZ. CBA is least affected – its capital position is estimated to actually improve from the APRA proposals and it has less exposure here.
If the two regulators stick to their plans, the banks will need to raise additional capital and ANZ, at least, will probably need to sell off or “rationalise” parts of its portfolio.
A slow retreat?
One way around the impasse would be for a bank to list on the New Zealand stock exchange. The listing of large bank like ANZ New Zealand listing would be transformative for the NZX, and there would be plenty of appetite from investors.
But Massey University professor of banking David Tripe thinks this is unlikely.
“It’s a conceptual possibility but it doesn’t deal with all the issues unless they can clear these entities off their balance sheets completely, because otherwise it just ends up being on the parent bank’s balance sheet as minority interests.”
Macquarie Wealth Management analysts agree, and are quoted as saying APRA’s proposal of favourable treatment for at least the first 10 percent of bank capital invested in New Zealand means “the prospects of full New Zealand divestments are less likely, and banks would either look to divest portfolios, partially divest businesses or look for joint ventures”.
Tribe says the banks will have started looking at the parts of their portfolio that are the least profitable.
“The capital requirements are coming in on a staged basis so there is no need to panic”, he says – but rural borrowers and small business borrowers may need to be prepared to pay a bit more. They may also find their previous or current lender doesn’t want to lend them any more money.
As for hedge funds from the United States and Europe looking to buy up portfolios of rural debt, ANZ said last month – before the APRA proposals were released – that it had been approached by funds looking to buy farm loans.
“We have chosen not to pursue the path of divestment”, the bank said then. “ANZ is the largest agri-lender in New Zealand and our group board has said it wants us to stay the largest.”
That could be because getting a good price for a portfolio of rural loans is hard. Hedge funds like a uniform portfolio (such as home loans) and rural loans are a lot less predictable, says Tripe. “ Foreign hedge funds would want them, but at a discount”, he says.
He says it is more likely that, if the Australian banks tighten lending, other players such as Chinese banks will decide they want to enter the rural banking market to fill the gap and “set up infrastructure here accordingly”.
“That’s the way I would expect it to happen.”
ANZ suggested another option in its submission to the RBNZ – “restructure the New Zealand operations so that some customer relations are with ANZ [Australia]”. This would have to be carefully managed so it did not fall foul of the RBNZ’s policy on outsourcing. Simply servicing the customers from Australia wouldn’t help with capital requirements; the accounts would need to be transferred over completely.
Tripe said you could argue that they might be better off as customers of ANZ Australia, which is covered by the Australian Government deposit guarantee scheme.