David Hargreaves believes a sale of UDC Finance to a credible New Zealand financial institution might be the only noble way out for the ANZ after the collapse of its ill-thought-out attempt to sell the business to Chinese conglomerate HNA

By David Hargreaves

Well, that's a very big mess that anybody should have been able to see coming, but apparently ANZ's head office couldn't. 

ANZ now has the big pre-Christmas hangover it must have been secretly expecting for the past few months.

China's HNA in contrast may well be secretly relieved. In theory HNA could challenge the Overseas Investment Office decision not to allow it to take over UDC in a planned $660 million deal. But I don't think it will. 

The clue to that comes from the second sentence of the brief statement HNA put out in response, which was: "The current political environment in New Zealand relative to foreign investment will play a significant role in our determination of next steps."

Yep, that refers to the change of Government, a new Government that has already moved to put in place a ban on offshore investors buying New Zealand houses. Winston Peters has previously said he would block the UDC sale to HNA if he was in Government after the election. Well, guess what. He's now both Deputy Prime Minister and Foreign Minister.

So, HNA will not appeal and they have the perfect excuse to now walk away from the deal. 

Would the deal have gone ahead in any case? Well, I suppose it's academic now, but I very much doubt it. The reason for that becomes quite clear if you simply google 'HNA'. Here's one recent article that sums up the situation quite well. 

I would add to that the fact that HNA hosted a meeting of eight major Chinese banks last week that it portrayed as a sign of support, but the Financial Times reported someone from a rival financial institution, thus: "A meeting like this is extremely unusual. It almost never happens." 

However, I would stress that this is not about bashing HNA. It has acted in good faith as a willing buyer of UDC.

My criticism here is of ANZ - specifically the head office in Melbourne, because my feeling is the ANZ NZ CEO David Hisco didn't want to sell UDC.

UDC has been well-run and profitable. It performs a valuable service in the New Zealand business scene through vehicle and asset financing. It was no drain on the ANZ's balance sheet, since it was largely self-funded by offering secured debentures to a willing New Zealand public.

The powers-that-be in Melbourne gave seemingly little consideration to the New Zealand perspective and went grasping for a high offer price for UDC.

They got it, but from a company that was not known in New Zealand and which had grown from nowhere in a very short space of time. 

There were other potential buyers in the mix - including from New Zealand. But they weren't probably going to offer the same price. If the ANZ had sold to an NZ company, however, the deal would unquestionably have been consummated some time ago.

ANZ's cash grab

But ANZ grabbed for the cash, without it seems a clear understanding of the problems that might lie ahead. It was clear to a lot of people when the deal was announced in January that there could be some real problems with it.

What were they thinking? They grasped at an offer from a company with no presence in NZ and of which little was known here. The fact that the OIO has, remarkably, seemingly not been able to satisfy itself who even controls HNA just adds to ANZ's folly. 

UDC is a great little New Zealand business and it deserved better from its Australian owner.

As I have said before, I think this was a classic piece of 'head office' decision making by ANZ. This interview my colleague Gareth Vaughan did with ANZ chief executive Shayne Elliott in April of this year is well worth looking at again.

Specifically on UDC, Elliott said this: "And we decided that's not an area, a finance company in New Zealand, [although a] good business, [with] decent returns, [that] provides a service to the community, we are not the best owner for that. And we would rather put our financial and intellectual capital into our core businesses around being the best bank for people who want to buy and own a home, or people who want to start and run a small business." 

So, ANZ is not "the best owner" for UDC, which means that as of now UDC will remain for sale. ANZ cannot now credibly say it will be a long-term holder of the business.

Swirllng uncertainty

All the uncertainty that has for nearly two years surrounded this 80-year-old business (UDC) will remain swirling around it.

To be clear, UDC continues to be well-run and profitable. 

But what has happened is that with all the uncertainty around it, depositors have been pulling their funds from it in droves. The result is that it is now heavily dependent on ANZ for its funding.

Previously UDC was pretty much independently funded, via public deposits, albeit that it was able to lean on ANZ's high credit rating to enable that.

It is unlikely that UDC will be able to strongly attract investors' funds again till ANZ resolves the ownership question. 

Whoever buys it, eventually will have to handle the situation of providing the funding - currently about $1.4 billion - that ANZ now provides to UDC. Over time the new buyers, depending on who they are, might be able to once again encourage investors back into UDC. But it will take time. 

So what about a buyer?

Eat humble pie, sell to a Kiwi

Well, in my opinion, the ANZ Melbourne folk need to eat some humble pie and accept that they aren't going to get anything like $660 million for the business.

For the sake of UDC and its ongoing health, they should look to sell to a credible New Zealand enterprise.

We know that Heartland Bank was very keen - although how it would fund such an acquisition would be a key question. But where there is a will there is a way. And there's no doubt that installation of such an owner might help to restore some public confidence back into taking up investments with UDC.

Or what about Kiwibank? Maybe with its new backing from the NZ Super Fund and ACC it could consider such a deal.

ANZ has made such a mess of this that I think its biggest priority should not be the price - but on getting the best owner. And to be honest I think it owed that to UDC all along.

I hope for the sake of UDC and its staff - and for those who have enjoyed borrowing from it and investing in it - that this is sorted out soon.

Sometimes you have to swallow medicine that doesn't taste too good. I think this is one such occasion for those at the top of ANZ.

See here for our previous articles on the UDC sale

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40 Comments

Excellent article .... well done .

A little more subtly balanced than my comment earlier today likening the mess or potential mess to an Augean stable

Its a mess for ANZ headoffice who seem to have looked forward to a nice fat bonus for doing nothing (what changes eh?). Meanwhile UDC who's function is essential for small businesses continues to be adversely impacted by these incompetents? which then makes me wonder if there is an impact on small NZ businesses ability to get investment capital? Otherwise ANZ seems to want to only invest in houses which is "safe" but does bugger all for a real economy.

NZs real economy is houses.

As you say, classic Head Office Knows Best. It would be hilarious if it didn't happen so often. It is like a movie franchise, UDC - The Head Office Strikes Back, sequel to Dick Smith - The Head Office Returns. Having destroyed the business' independent funding, why not a partial float? Very face saving and all that.

Better yet, a partial float of ANZ NZ.

Why would we want to clean for ANZ
They are a bunch of Auckland cowboys , like the rest in those highrises in the CBD.

Wow. I can’t believe there was a serious proposition for sale put to OIO where no one was able to establish to OIO who even ultimately owned the acquirer. I am sure ANZ were equally in the dark but thought it “didn’t really matter”. What a bunch of muppets. I mean, surely it’s the first thing OIO need to know.

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And a note for all those who say you can get around the new foreign buyers rules by using trusts and companies - looks like you can't

How is it possible to not identify who the buyer would be...unless they are trying to hide who that is?

What's clear from this debacle is that ANZ has been happy to throw UDC, its business and its customers - all valuable to New Zealand - to the wolves. ANZ's behaviour in this is nothing less than scandalous - financially, nationally, ethically and in management duty of care. We are remarkably fortunate that the OIO had its eyes open, on all of our behalfs. Other regulators elsewhere in the world have been too late out of bed and are just catching up with the activities of this mysterious and ill-reputed Chinese behemoth.

As capital gains in housing slip off the hook, a New Zealand bank - as David Hargreaves suggests - may well see UDC as a viable (and still respected) route into gaining and growing specialist investment in productive and profitable New Zealand businesses.

It sounds like UDC Finance is bleeding ANZ dry. If it wasn't loosing so much money the ANZ wouldn't be trying to offload it. Banks don't sell profitable businesses. It reminds me of the NAB that off-loaded Clydesdale recently. That was also bleeding them dry.

Did you even bother to read the article? It reads, “To be clear, UDC continues to be well-run and profitable”. Even worse, you have someone equally ignorant who liked your post. Good grief.

Also, "loosing"? A comment that is so wrong on many levels.

ANZ parent bank wants to offload this for a reason. UDC unsecured loan book has exploded in size in recent years. ANZ has foresight to know what the next stage is in this credit cycle - loan write offs! All good lending until the music stops and this company UDC has full on exposure to it - $3 Billion worth!

If UDC, on a "stand alone" basis, is so well run and "secure" with such bright long term prospects then, why did debenture holders start pulling the plug when news broke of the changing of ownership? They only invested because when the inevitable credit crunch comes ANZ would presumably be in a position to inject further cash where HNA might not.

https://www.stuff.co.nz/business/money/99977028/borrowers-turn-their-bac...

ANZ Australia will need to provide support to the New Zealand customers behind these loans - they are sure going to need it.

It was actually their strategy.

A close friend of mine was an investor relationship manager, and literally, her job was calling up debenture holders recommending they re-invest with ANZ. Some investors weren't happy and pulled their money out entirely & the rest re-invested with ANZ.

Total shit-show and a completely mis-managed sale. There were interested buyers here in NZ but Head Office preferred the larger bonus instead of what is right for the business.

"The result is that it is now heavily dependent on ANZ for its funding."
It may be "profitable" but if nobody other than the ANZ wants to provide it with more funding, or replace the withdrawn funding, doesn't that send the ANZ a message? If the ANZ didn't provide this additional maney, it will slowly get smaller and smaller and eventually disappear.

Total retired poppyc@ck

I'm bored on the last day of work. Not enough people are in financial distress. So, I'll call you on this.

Where is the evidence that UDC's unsecured book has exploded in recent years and as you imply is $3 billion?

https://www.udc.co.nz/pdf/Full-Financial-Statements-2016.pdf
Total credit risk exposure is $3.035 billion.
Note 6: Hire purchase is $1.1 billion.
Notes to the Accounts c. Concentration of credit risk. Personal = $640 million. The rest is core NZ industry.

If UDC goes down, it would be because of a major depression and then we are all sunk.

As for why they likely need deposit support, the market is scarred from South Canterbury Finance etc, My parents lost money in the wider debacle and would never touch anything with the word finance in it.

Ex Expat, you think economic cycle is a economical bicycle!

Seriously, if you think such a large increase in loan book size in a short space of time doesn't come with a hangover then you need to spend some time a debt recovery department - lol!

It's all good lending till a storm comes then it turns toxic. Of all people, you should have the insight to know this! Gawd, this is a huge portfolio of unsecured lending - its the first domino to fall and it's not a depression scenario that would bring that on.

Just look back to 2008, was NZ in a depression then? NO. I recall reading that 49 finance companies failed post 2008 and UDC was not one of them, why?, because ANZ no doubt propped it up. So as we come into the downside of this latest lending binge, ANZ will need to suck a lemon this time round too.

Now, get back to work!

UDC is an asset financier, not a cashflow lender so most of the debt is secured by assets other then property.

Most of the finance companies that failed has exposure to an overcooked property market: UDC continued as it wasn't exposed to speculators or trumped up property values.

.

And yet the big banks are the biggest source of capital for Harmoney and other P2P lenders

From memory, most of the funding is from Heartland Bank and SBS (and I think some kind of American fund I can't remember the details of) - not exactly big banks.

Only bank I'm aware of is TSB Bank. They were called out for lending through Harmoney and initially seemed reluctant to disclose it: https://www.interest.co.nz/business/88207/tsb-bank-says-it-has-lent-50-m...

Ahhhh - the things we dabble in just to enhance the bottom line!

My mistake - TSB not SBS. Confusing my acronyms. Heartland are definitely involved too, as a shareholder and providing a 'funding line' https://stocknessmonster.com/announcements/hbl.nzx-254972/

From the article you have linked, "Heartland has said it has an agreement to lend up to $85 million through Harmoney in total." and "By December 31 last year Heartland had lent $62 million through Harmoney's online platform"

Thanks, there's a lot of blue on that funding mix graph

Sure is!

mfd, Gareth, thanks for the clarification. I had forgot about Heartland being a bank and its considerable involvement!

Most of the main Banks have an Asset Finance division and compliments other forms of Lending (Personal, Property, Cashflow etc). BNZ had one going back in early 1980's and ASB commenced in last 5 years. Westpac had AGC, now in their own brand now and Kiwibank Kiwi Asset Finance.

Quite the opposite in terms of shunning most banks use asset finance when there may be no land based assets to use. Lending against assets ensured loan structures are within the period of economic life of asset financed.

I suspect the recall of Banks Asset Finance may be low as it operates within umbrella of the banks total operations whereas UDC was pushed out there as a seperate / standalone brand.

Money Man, I just checked the RBNZ sector lending register and yes there 11b in consumer loans outstanding by NZ registered banks.

https://www.rbnz.govt.nz/statistics/c5

Based on those numbers (still increasing steadily) I stand corrected that banks do not appear to be shunning in this area of lending :)

Appreciate you taking the time to clarify.

Your argument is confused retired poppy. Reread the first couple of sentences?

.

Consumer Loans ie Personal Loans are unsecured loans, backed by Bank Off-shoots such as UDC Finance etc. If a borrower defaults on their loan, the investor with money deposited earning a higher interest rate will take a hit. Is this the Asset Finance regime that you are referring to?

Hi TainuiBabe, yes :)

Hi RP. You and I are on the same page. I worked in the banking industry for years and you are spot on with many of your comments. I appreciate reading your posts! You have good sound knowledge of the banking industry for an outsider. I wonder if you have been on the inside at some point?

Money man is the insider and based on my understanding of hire purchase etc he/she is on the money. You two not so much.

TainuiBabes, yes, I was an insider during the 80s/90s and saw a lot happen! It was an incredible and enriching experience. My service was from 1987 to 1998. I served in the recoveries, customer services and operations departments at two major banks. I survived several restructures and saw many talented managers and underlings come and go. Many product launches fizzled yet were dressed up cleverly to be fit for cork popping! Often the recoveries being at the anal end were left to pick up the pieces. When it all went code red, there was always loads of overtime!

Ex Expat will predictably argue that I'm out of touch. But unless he can prove that greed has been eliminated then it is Ex Expat that might be out of touch.

The original comment referred to the accuracy of UDC’s exposure to retail debt. Their accounts show a different picture to your statement. If they have been loading up on consumer debt it doesn’t show. Equally TainuiBabe’s assertions over it being insecured are incorrect if it’s hire purchase over cars, which I think it is.

Personally, I don’t see greed ever being stamped out of human psychology. Someone doing my job 50 years ago would have seen the same issues: poor management exacerbated by leverage and sometimes a dose of bad luck. The biggest concern I have is society protecting people from their poor decisions. If you are over leveraged in property I have no desire to save you with my cash. I don’t expect to be bailed out either and I manage my affairs accordingly. No debt is a good start.

I was involved in UDC in 2004-2005 during the Franchise debacle (head hunted to join when UDC bought back the franchise areas it sold a few years before) and at that time its management was crap with a poorly thought out and executed plan to franchise out the frontline sales force which then required them to disestablish the concept. As a result most of the experienced and respected frontline sales force resigned and went off to competitors and the newly established CreditFlex.
The result was turmoil during 2004 / 2005.
I understand from contacts within UDC that its now a well run profitable business.
I also understand ANZ Group need the capital invested in UDC to meet its capital requirements in Australia and was seen as a quick and easy sell.

So I guess the ANZ won't be meeting it's capital requirement anytime soon then, since their planned sale to offload UDC has just gone pear shaped. Did you also know that out of all the Big 4 Banks, that ANZ had captured the largest chunk by far, of the Auckland Mortgage Asset Book? The ANZ is the most exposed to lending losses in Auckland. As a side note, the other bank that will be most likely to loose if house prices fall in Auckland, is Westpac. But not many people would be surprised by the latter.

If ony ANZ had applied the same wit, sophistication and business intelligence, that they have toward the local home loan business.