Brian Gaynor: Aussie banks' gain is NZ businesses' loss

Kiwibank doesn't counter the Aussie-owned banks' reluctance to lend to businesses. Photo / Richard Robinson

The Reserve Bank's twice yearly financial stability report, issued this week, gives an excellent overview of New Zealand's financial system.

Unfortunately the report shows that the four Australian-owned banks are becoming more and more dominant, and lending to businesses continues to decline.

New Zealand's financial sector had total assets of $472 billion at the end of June, comprising $373 billion of bank assets, $16 billion in insurance, $23 billion in non-bank lending institutions and the remaining $60 billion in other financial institutions, mainly fund managers.

The main features of these figures are:

* The financial sector is one of New Zealand's largest businesses with total assets of $472 billion compared with the Government's $223 billion asset base. Fonterra, the country's largest company, has assets of $14 billion.

* The banks are becoming more and more dominant, as they now have 79 per cent of the sector's assets compared with 69 per cent 20 years ago.

* The four main Australian-owned banks - ANZ National, ASB, BNZ and Westpac - have total assets of $300 billion, which is 80 per cent of bank assets and 64 per cent of financial sector assets.

* The three New Zealand-owned banks - Kiwibank, Southland Building Society and TSB Bank - have assets of only $19 billion or 5 per cent of the country's banking assets.

The Australian owned banks are far more dominant in New Zealand than they are at home, mainly because the superannuation and fund management industries are much larger across the Tasman.

At the end of June, the banks had 58 per cent of Australian financial sector assets compared with 79 per cent in New Zealand. Superannuation funds and investment managers held 26 per cent of Australian financial sector assets compared with 13 per cent here.

Bank domination is an unhealthy development as far as the New Zealand economy is concerned particularly as the latest figures probably understate the banks' strong position.

This is because non-bank lending of $23 billion does not take into account the full write-downs from failed finance companies. The Reserve Bank takes into account the book value of finance companies until they are fully written down, and many receivers have yet to do this.

Thus the banks will probably account for more than 80 per cent of the country's total financial assets when the finance company debacle is fully accounted for.

The problem with bank domination is that they take a cautious approach to lending, and the number of non-bank institutions that can fund riskier projects is limited.

So who will back property developments, start-up companies and other high risk projects?

The banks could be tempted to lend to these high risk projects, but this could create huge risks for them and the New Zealand economy.

The absence of strong non-bank lending institutions encouraged many European banks, particularly in Greece, Ireland and Spain, to lend on high-risk projects, with disastrous consequences for several countries.

The near collapse of the finance company sector has had a negative impact on domestic companies because these non-bank lending institutions also lend to businesses.

Reserve Bank statistics show that lending by non-bank institutions to businesses fell $9.3 billion in September 2007 to $6.4 billion at the end of September this year.

Combined lending by bank and non-bank institutions to businesses fell from a high of $80.8 billion in November 2008 to $71.5 billion at the end of September this year.

These figures clearly show that banks are reluctant to lend to businesses, particularly in a difficult economic environment, even though they claim they are keen to do so.

Business has been the big loser as far as combined bank and non-bank lending is concerned:

* Lending to agriculture has gone from 10.9 per cent of total loans in June 1998 to 16.0 per cent today.

* Lending to businesses has fallen from 29.6 per cent to 23.6 per cent over the same period.

* Households or individuals now account for 60.4 per cent of total lending, compared with 59.5 per cent in June 1998.

Essentially the Australian banks, in New Zealand and at home, are asset, rather than cash flow, lenders. They lend against residential property and farms, and this has served them well during the current economic crisis.

But it doesn't create a great environment for business, particularly in New Zealand. We are dominated by the banks, and we don't have sufficient non-bank lending institutions, superannuation or managed funds to counter balance the reluctance of banks to lend to business.

Kiwibank, the largest New Zealand-owned bank, doesn't provide a solution to this problem as 78.5 per cent of its lending goes to householders, compared with 60.4 per cent of all bank and non-bank lending that goes to households.

It is much more profitable for the banks to lend against residential mortgages because this type of lending requires less capital and credit analysis skills are far less onerous for residential mortgage loans than they are for business lending.

This is where the NZX comes in. It should be doing far more to develop its corporate bond trading activities, because this will continue to be an important funding source for large companies.

Companies obtain capital through the ASX in Australia but the NZX plays a limited role in this regard for New Zealand businesses.

The banks' conservative lending policies have benefited them during the global financial crisis.

The latest financial stability report notes that "the level of non-performing loans remains much lower than in the 1990s recession and much lower than for banks in many other countries".

The Reserve Bank also notes that bank profits improved markedly through the end of last year.

It wrote that there has been "a decline in loan loss provisioning and some of the provisions associated with the tax case were reversed following out of court settlements".

The central bank gives our banks a clean bill of health - but that doesn't solve the basic flaws of the New Zealand financial sector.

We are dominated by Australian-owned banks which have taken their residential property-oriented approach across the Tasman.

This is not a problem in Australia because it has are a large number of non-bank lending institutions, superannuation funds and fund managers to finance businesses.

But that is not the case in New Zealand. We don't have a large non-banking sector and, as a result, New Zealand businesses find it difficult to obtain funding.

The KiwiSaver scheme will boost the non-bank funding sector, but a high percentage of this is either going overseas or back into the banks through conservative KiwiSaver funds.

The Reserve Bank has taken over the regulation of non-bank deposit takers in an attempt to restore confidence to this important sector. But once again this is too little, too late.

Better regulation is important, but there also has to be a growth strategy, and a strong commitment through Government policies, to encourage investors back into the non-bank sector.

With the notable exception of KiwiSaver, there don't seem to be any other strategies or policies that will reduce New Zealand's dependence on the four major Australian-owned banks.

* Brian Gaynor is an executive director of Milford Asset Management.