Between the lines: NZ Post shrewd enough to assess bank risk

By RICHARD BRADDELL

Finance Minister Michael Cullen provided some timely reassurance last week when he emphasised that, among other things, NZ Post has sharpened up the exit strategy for its banking operation.

The official papers on the bank, which have now been released, have certainly done little to dispel doubts about the proposal.

Those who have lined up against the bank include not just opposition politicians, but Treasury and the Crown Company Monitoring Unit. Even the Reserve Bank has had some cautionary words.

But as Dr Cullen observed, there is a fundamental difference between Treasury and camp followers who remain emotionally committed to selling state assets, and his Government, which is in the business of preserving them.

Would the NZ Post proposal have come in for the same roasting had it originated from the private sector? The Warehouse, for instance, has been entertaining the idea of entering banking as well.

The answer is, of course not.

So should state-owned enterprises, which are charged with acting in a commercial manner, be inhibited in pursuing business opportunities which they see as making good sense?

The Government obviously feels they should not be. Given that view, it is easy to see why the banking operation has been approved.

NZ Post has a track record of being rational. Its postal business is one of the world's best. It has invested shrewdly in new earnings streams, it has developed a useful international consultancy business, it has valuable investments in IT-related companies and it keeps a weather eye to e-commerce through small shareholdings.

Its record alone suggests that it should be allowed some credit for its commercial judgment.

On the other hand, consultants Cameron & Co, who reviewed the banking proposal, do raise some valid questions. The concern is not whether NZ Post will run a proper bank, but whether the requisite break-even 100,000 customers will be achieved.

NZ Post says yes, Cameron, maybe. But even if Cameron is right, the downside risk is portrayed as manageable. Cameron suggests an economic loss of $5.7 million, based on NZ Post's cost of capital. And that is still an accounting return of 9.9 per cent on equity.

It all sounds like the kind of risk a red-blooded private-sector entrepreneur would be hard-pressed to ignore.

But this is not the private sector. If things go wrong it is the taxpayer who will pay the bills.

That is why, given the Government's decision to proceed, a sound exit strategy is so important. If the high hopes for the bank prove ill-founded, it is vital that NZ Post moves quickly and decisively to stem excessive losses. This is the basis upon which the proposal has been sold to the Government, and there should be no backsliding.