By Gareth Vaughan
The recently released Growing New Zealand’s Capital Markets 2029 report, which offers "a vision and growth agenda to promote stronger capital markets for all New Zealanders," has a rather large elephant in the room.
This elephant is the banking sector.
The report notes both banking and agriculture are under-represented in the equity markets, suggesting investors would welcome a "broader ability" to invest in the two sectors. In terms of the banking sector, the under-representation is due to Australian ownership of the four big banks, government control of Kiwibank, and mutual/co-operative style ownership of smaller banks such as SBS Bank and The Co-operative Bank, the report points out. TSB is owned by the TSB Community Trust. Heartland is the sole NZ bank listed on the share market.
The report was produced by EY. It's from an industry-led working group "Capital Markets 2029" initiated by share market operator NZX and the Financial Markets Authority, and is chaired by ex-investment banker Martin Stearne. It comes a decade after John Key's government initiated a Capital Markets Taskforce led by the late investment banker Rob Cameron, which recommended partial listings of government owned companies. These followed with selldowns of the Government's shareholding in Genesis, Mighty River Power, Meridian Energy and Air New Zealand.
The 2029 report also comments on bank capital. It notes the Reserve Bank's proposed increases to bank regulatory capital requirements could see a decline in the issuance by banks of Additional Tier 1 (AT1) and Tier 2 (T2) capital instruments. These, it says, are popular with investors - especially retail investors - and the Reserve Bank should "look for ways to retain AT1 and T2 instruments that meet their objectives and the needs of investors." These are typically debt or hybrid debt-equity instruments offering appealing interest rates but can be confusing for retail investors.
On the Reserve Bank's actual capital proposals, the report says an in-depth review of these isn't within the scope of the review. Nonetheless it weighs in with concerns about less capital potentially being available and higher borrowing costs, especially impacting the dairy and SME sectors. This incidentally, ties in with arguments the four major banks and BusinessNZ, of which the four are members, have made in opposition to the Reserve Bank proposals. (You can see more on the Reserve Bank's capital proposals here, here and here).
What about Aussie bank IPOs?
One thing that is completely missing from the report is any mention of the suggestion that, if implemented, the Reserve Bank's capital proposals could potentially see one or more of the Australian parents of NZ's big four banks look to list some, or all, of their Kiwi subsidiary on the NZX. Should this happen it would clearly tick the box of giving investors more exposure to the banking sector.
In fact if, hypothetically, ANZ New Zealand, ASB, BNZ and Westpac NZ were listed on the share market rather than being foreign owned, would we even need to establish a group to do a report on the under-performance of our capital markets?
The report sets out what it calls "a series of visions and ambitions for the industry and the country to identify what ‘success’ might look like across the capital market ecosystem and against which future assessments can be made." One of these is: "The market capitalisation of New Zealand’s equity capital markets grows as a stronger ratio of New Zealand’s GDP."
According to the NZX website at the time of writing, the NZX equity market's capitalisation is a shade under $159 billion. The most recent NZ Gross Domestic Product figures put GDP at $296 billion for the March year. Those figures put the NZX equity market cap at 54% of annual NZ GDP.
Meanwhile over in the Lucky Country, the ASX market cap sits at about A$2 trillion putting it just ahead of June year GDP of A$1.95 trillion. The biggest company listed there is ASB's parent, Commonwealth Bank of Australia. Westpac NZ's parent, the Westpac Banking Corporation, BNZ's parent National Australia Bank, and ANZ NZ's parent, the ANZ Banking Group, were sitting at fourth, fifth and sixth by market cap at the time of writing. The four's combined market cap? A cool A$409.91 billion.
Now as I reported earlier this year, Deutsche Bank analysts Matthew Wilson and Anthony Hoo put some valuations on the big four NZ banks. They had ANZ NZ at $29.759 billion, ASB at $18.023 billion, BNZ at $15.498 billion, and Westpac NZ at $13.802 billion. That's a combined $77.082 billion. Again hypothetically, imagine if all four were listed on the NZX? Based on Deutsche's valuations, that means a total NZX market cap of about $236 billion. That's equivalent to 80% of March year GDP.
'An indigestible morsel'
Wilson and Hoo are sceptical that the Aussie parents will float their Kiwi subsidiaries in full in response to the Reserve Bank capital proposals, should the proposals go through largely unchanged. The analysts suggest the four banks, that control about 88% of both NZ banking system assets and liabilities, "both individually and collectively, would represent a likely indigestible morsel." And capital issues and tax inefficiencies could be a barrier to even a partial listing of some banks, even if this would be "a sensible and well received outcome."
Citigroup analysts Brendan Sproules and Thomas Strong, meanwhile, suggest only Westpac NZ and ASB are listing candidates.
"Given their size Westpac and CBA appear to be the only likely candidates. These NZ subsidies would be ranked in the top 10 companies on the NZX."
"Our analysis shows that the NZ equity market is too small for a full or partial IPO. A full IPO of CBA's or Westpac's NZ subsidiaries would be 6-8x the largest ever IPO on the NZX. This appears unachievable in our view. A partial IPO would create liquidity issues, [a] credit rating downgrade, as well as severely curtailed capital raising abilities," say Sproules and Strong.
I would also argue that these four banks will remain appealing assets for their parents to hold even if the Reserve Bank capital changes are as tough as proposed. The Aussie parents may just have to learn to live with smaller dividends flowing west.
So perhaps it's best not to hold your breath whilst waiting for a local listing of any of the Aussie owned NZ banks. Certainly not a via a full selldown by a parent bank. What might be a safer bet though is that we have another capital markets review about a decade from now.
*In terms of agriculture, the report notes Scales, NZ King Salmon, Synlait and A2 Milk are listed. But many assets are owned by individuals or in co-operative structures in dairy processing and export, meat processing and export and fertiliser.
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