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Gareth Vaughan suggests ANZ and its fellow big banks are starting to look snookered. Could it be time for them to accept they're now utilities?

Gareth Vaughan suggests ANZ and its fellow big banks are starting to look snookered. Could it be time for them to accept they're now utilities?

By Gareth Vaughan

Caught between the capital demands of regulators on both sides of the Tasman Sea, the ANZ Banking Group is starting to look snookered, requiring a clever shot to get out of a tricky position.

Or alternatively, the bank's hierarchy could swallow a dead rat and accept an easier option.

This would require ANZ's management, board and shareholders, and ultimately their counterparts at Australasia's other major banks, to accept what has been unpalatable to them: Big banks are now utilities and their future return on equity (RoE) is going to have to reflect this.

In a 2016 speech Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis, suggested "turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail, with regulation akin to that of a nuclear power plant." Some may argue this is precisely what the Reserve Bank of New Zealand (RBNZ) capital proposals, which would require NZ banks led by the big four to bolster capital by about $20 billion over five years, would do.

But there's more to it. The conduct and culture problems within banking, and the Financial Markets Authority insisting banks remove pay incentives linked to sales by frontline staff, stem to a significant degree from a drive by banks to maximise profits. This is against a backdrop of key retail banking products such as mortgages, deposits and even KiwiSaver, being increasingly commoditised as regulation tightens and risk appetites decline in a debt sodden, low interest rate and lower growth world.

Some aspects of banking networks have long tied in with utility type services. ATM networks for example, and the infrastructure behind the processing of interbank transfers. And now developments in payments threaten to commoditise bank services further with the emergence of open banking and the fintech revolution. On top of this banks are at risk of losing key customer relationships to technology giants through the likes of Apple Pay.

Utilities are typically highly regulated, sometimes with price and profit controls in place and lower RoE than NZ's big banks deliver. Certainly their RoE, a measure of how effectively management is using a company’s assets to create profits, tends to be lower than the 14% to 17% range NZ's big four banks have been in of late.

Bankers may not like the comparison with electricity, gas and water suppliers, or even telcos or airports, but similarities are there. Arguably bank capital requirements and stress testing set de facto price and profit controls much like those many utilities face. 

Lower RoE appears almost inevitable following the Australian Prudential Regulation Authority (APRA) decision to reduce the ability of the big four Australian groups to inject more capital into their Kiwi subsidiaries, and the RBNZ's strong line so far in its bank capital review.

ANZ, having bought the National Bank from Lloyds TSB for almost $5.5 billion in 2003, today generates a quarter of group earnings in NZ compared to about 10% of group earnings ASB, BNZ and Westpac NZ's parents make on this side of the Tasman. Thus ANZ said the APRA decision, aimed at mitigating contagion risk within banking groups, means it may have limited capacity to inject capital into ANZ NZ with its exposure to ANZ NZ "at or around the revised limit" based on its current balance sheet.

This comes, of course, with final decisions in the RBNZ's bank capital review due in November. ANZ has estimated the RBNZ's proposals would see ANZ NZ requiring between NZ$6 billion and NZ$8 billion of new capital over the proposed five year transition period. The lucrative dividend flow west from NZ appears set to shrink. And longer term an RoE range of say 8% to 12% may have to be accepted by NZ major bank owners.

UBS analyst Jonathan Mott has floated an idea of what ANZ could do to meet both the APRA and proposed RBNZ capital requirements. Mott's suggestion sees a Kiwi subsidiary bank "upstream" a dividend to its Aussie parent, which then reinjects the same value of capital back into the NZ subsidiary in exchange for new shares. He points out that this, based on a figure of $1 billion, would see $580 million effectively allowable as Common Equity Tier 1 capital for both the parent and subsidiary.

In Mott's example, the same $580 million of capital is being used to protect depositors in both Australia and NZ. Whilst this is currently allowable under APRA rules, Mott points out a key premise of Basel 3 international bank capital standards is that the same capital isn't eligible to more than one bank. Thus going forward it's hard to see regulators on either side of the Tasman tolerating this "double gearing" for long.

Doubtless there are others both within the big banks and at professional services and advisory firms cooking up ways the likes of ANZ may be able to meet both their APRA and RBNZ capital requirements, potentially by exploiting a loophole, whilst retaining the lion's share of their strong profitability. But neither the regulatory nor public appetites for banks bending the rules in the pursuit of continuing record profits are likely to be large.

The big banks have threatened to shrink their NZ business, or potentially sell out of NZ against the backdrop of the RBNZ capital review. The first option would damage public trust and thus their reputations. And if they sell they'll be selling businesses worth less than they were a year ago due to a weaker earnings outlook because of higher future capital requirements. Hence selling below book value could be on the cards.

Thus the big banks, led by ANZ, may be better off biting the bullet and accepting a utility-style future.

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Yes, they better realise that this spotlight on them is not going away anytime soon.
The sooner they accept that regulatory instincts have changed, it is better for them to reform from within and start working for the development of the economy and the betterment of customers.
Their small numbers should make regulation easier also. I can sense RBNZ also changing its focus and chomping at the bit, so to speak, to take on more roles, some of which they should be already doing.


exactly and thanks for a great article.

Like I say, In one month, foreign banks have returned $400 million profit offshore from NZ.

Fonterra is lucky to do this in a year.

After a decade, which is not long in economic terms, Foreign Banks will return $50 Billion, while Fonterra may have made $5 Billion, with luck.

There is no way NZ has a Foreign Bank future, as our largest exporter working dawn to dusk with huge risks and Debt, can't even get close to these corner building businesses operating from pokey offices in NZ cities and towns.

Foreign Bank investment in NZ is nothing compared to our Farming Industry, yet the returns are off the charts.

And the returns are taken out on NZ where they were generated.

How does an ex NZ Prime Minister sleep at night knowing what the Bank he is Chairman of is doing to our economy and our childrens future. ?

Imaging the Healthcare and schooling and infrastructure NZ could pay for if this $5 Billion profit was kept in the NZ economy.

It used to be before Asset Sales was hammered as the solution to end NZ economic woes. Yet we are now far worse off than we have ever been.


Year ended March 2019 our Trade Balance was $4.43 Billion. So we're basically handing that over to the banks, and some....

I think Neel Kashkari was Hank Paulson, Fed Chief's assistant who authored the bank rescue proposal involving federal assistance of $700 billion or so the banks in the US, in 2008, following the start of GFC.
He was in the thick of the bank bail out there. Paulson being ex-Goldman Sucks, both their credibility is suspect, in my opinion.

Regulations come and go and usually amplify the trend. The current wave of regulation is likely to amplify the slowdown in house price growth and could hit the political limits very fast. Homo bureauraticus has an exquisite sensitivity to even the slightest hint of the very mention of the slightest possibility of personal blame. It could all get very interesting for them, rather more quickly than they expect.

Senoir bankers, homo greediusmaximus, on the other hand, are carefully selected for their rhinoceros thick hides and ruthless ability to fleece anyone and everyone in the most sophisticated and unattributable way possible. So, expect bankers to plead "There is No Alternative" as they tighten the screws and ration credit to small business, knowing that this will force the regulators to do What is Best (for the bankers , that is). They are a patient and strategic lot and will eventually get all new regulations unwound as the years go by.

They are already TBTF. Now they are also TINA. What a great position to be in. They can hold the country to ransom forever.

I think that's the idea. Take a cut of everyone's lifetime earnings.

The ComCom's treatment of airports, lines companies, and gas transmission companies seems punitive when compared against the RBNZ's requirements on banks. Utilities under ComCom are limited to rates of return at least 40% lower than that of banks. The excess profits of banks are incredible as measured by the excess of profits to a fair return of capital as would be determined by the ComCom.

But there's more to it. The conduct and culture problems within banking, and the Financial Markets Authority insisting banks remove pay incentives linked to sales by frontline staff, stem to a significant degree from a drive by banks to maximise profits. This is against a backdrop of key retail banking products such as mortgages, deposits and even KiwiSaver, being increasingly commoditised as regulation tightens and risk appetites decline in a debt sodden, low interest rate and lower growth world. [my emphasis]

Hence, the drive to call upon the citizen taxpayers via government to inject a fiscal boost financed by bank underwritten crown debt, in our case. A typical crowding out the private sector ploy, that enables banks to load their balance sheets with "riskless" assets that can be swapped for inert central bank reserves at a later date. How negative will government debt yields be driven by speculation? I can only see realised losses for central banks as the proposed debt rolls over to infinity.

Yes, central bankers are not important, have no power and surely we're not responsible for the last two decades of unmitigated monetary policy disasters. Walk on, nothing to see here. Focus on fiscal policy! Link

The paywalled FT article can be read in full here. The NZ Herald felt a need to publish it here.

There is no end to it:

A war, either happening on the basis of tensions escalating or manufactured by some big powers may soon be the only answer to revive moribund economies, but only after the human and material price of the war is paid in blood and loss of wealth/cities, etc.
The coming Black Swan, any one ?

The big banks are the dinosaurs of the financial industry .... they face increasing competition from alternative sources of funding , internet start ups , and the like ...

... alike Fonterra ...Fletchers ... monolithic big firms are slow strugglers ... littler businesses are gonna eat their lunch..

Can't wait too long for that day to come, when the Big Banks are brought to their heel, here and everywhere in this World.

. . It wont happen overnight , but it will happen...

In the same way that EVs will happen , regardless of the ham fisted incentives or punishments meted out by the current government .... great changes are on the way , incrementally ...

... on our roads , in our banking ... lots money is being spent on research to usher in a new way of life ...

Hopefully Silicon Valley to come up with a viable alternative quickly.

In the BCG life-cycle, banks are dogs. The only product innovation is tech-related and new entrants will do it better. In the quest for ever-greater returns banks put profits ahead of customers interests and became riven with conflicts and operational complexity. There hasn't been a new product in financial markets for 25 years, yet they are still paid like surgeons. They need to ditch the aggressive sales culture, pay less and employ people with values and reward on integrity.

CDO's are less than 25 years old. .. they're a new product .. I'm sure you'll remember the impact Collateral Debt Obligations had on the financial world circa 2007 / 2008 ...

Synthetic CDOs too..

Physical CDO's have been around >25 years but I will give you credit default swaps and synthetic CDO's which have been around 18-20 odd years.

The only product innovation is tech-related

Yes. I use ASB and their online banking platform is quite good considering it came out of a banking institution. None of these product offer ideas would have come from the top brass though, even though they no doubt took the credit for it. Their salaries and bonuses have been driven by the "old school" revenue drivers: selling massive amounts of mortgage debt (well they don't actually sell it. That responsibility is still carried out by the foot soldiers).

The net banking initiative is good. But a sizeable portion of the in house IT work done by various banks is relating to some initiative or other, for fine tuning internal work processes. most ending up making things/working more complicated, with unintended consequences.

One example is the drive by banks to make customers use online banking more, making customers virtually remote tellers of the Bank, without pay. Many old people and people who don't trust this kind of technology for their financial transactions get a rude treatment when they go to the Bank. I have experienced this for the last few years.

Another thing is, the IT dept is self perpetuating in banks. They have to keep doing some small stuff to justify their continuous existence. The IT depts have become the internal TBTF, kinda. The top executives don't know the needs of various customer segments. They are generally enamoured of cost savings and pushing one system works for all method.

Also, the data mining technology being used by Banks is getting too intrusive and the front line staff cop the customers' anger when the staff ask specific questions based on data mined tips to push other products.

Soon when you go to the bank to do a transaction, the teller may ask you..sir, your wife's lipstick stock is finishing soon, and she needs new shoes ( based on the data mined from credit card transactions), would you like an overdraft/personsl loan to keep your wife happy ?

LOL - the HOD surgeon I knew at Wellington DHB earned less than the accountant/lawyer CEO. Mind you that was a decade plus a couple of years ago.

I can see a groundswell of support building for an enquiry into the banking sector, it needs to happen. I have just lodged a claim against HSBC for compensation for the insurance fees I paid on my credit card when I was in the UK early in the naughties. Theres been an enormous class action over those fees in the UK yet here we just accept being ripped off.

NZ has missed the opportunity to set up a Royal Commission already.
The 4 major banks here operate like an informal cartel. Nothing major to differentiate in the products, rates, fees, rules on staff behaviour, etc. RBNZ is facing a solid brick wall in breaking the barriers to effective regulation and supervision.
May be we can outsource the enquiry to ARPA or ASIC ?

Got caught out with the old "Unarranged Overdraft Fee" the other day. I don't recall ever setting up an Overdraft facility on my cheque account, yet rather than declining my purchase it allowed me to go overdraft. I'll be hitting them up to opt-out of this fantastic service.

The tail wagging the dog....
That needs to change!

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