What now for markets?
New Zealand’s big four paid out 28 per cent more last year in dividends to their owners across the Tasman
New Zealand's four major Australian owned banks paid nearly $3.5 billion in dividends to their parent companies last year — a 28 per cent jump on 2016.
Disclosure documents showed ANZ, Westpac and BNZ for the year to September 30 collectively paid $2.74 billion while ASB, which runs to a different financial cycle, paid its Australian owner Commonwealth Bank $450m in the year to June 30.
ANZ — NZ’s largest bank — paid the biggest dividend at $1.695b to its Australian parent in the year to Sep- tember 30. In 2016 it paid $1.36b.
While ASB paid the smallest dividend, at $450m, that was still more than double the $200m of 2016.
Westpac Bank was the only one of the four to drop its dividend payment, from $660m to $640m.
Bill Rosenberg, an economist for the Council of Trade Unions, said the four banks were a major contributor in NZ’s current account deficit.
The deficit means we earn less from the rest of the world for trade and investment than the rest of the world earns from us.
Rosenberg said the investment income from overseas ownership of the banking sector, after taking account of its small investment income from abroad, accounted for $4 out of every $5 of NZ’s current account deficit in the year to March 2017 — $6.3b compared with $7.7b.
The banks are also behind NZ’s high international debt levels — of New Zealand's net international debt of $287.8b at the end of September 2017, $112.8b was owed by the banks.
Borrowing from abroad allows the local banks to lend out more than t can be supported from local deposits.
But it can also leave New Zealand exposed if the money markets clamp down — as happened during the global financial crisis.
Massey University banking expert David Tripe said while it appeared a lot was going to the Australians, much of the dividends paid by Kiwi banks to their parent companies were recycled through subordinated debt where the parent lent the money back to the NZ subsidiary. “There was no recycling by the ANZ in 2017. BNZ there was definitely recycling.”
While the BNZ paid $700m in dividends to its parent National Australia Bank, NAB lent $900m back.
The parent companies can then call on the debt to be repaid at some point in the future, although Tripe said in some cases the banks had to get permission from the Reserve Bank to pay back the money.
“There is more control when the Reserve Bank has a say on it.”
Tripe said when a bank’s balance sheets were growing rapidly most of the profits were reinvested into the
New Zealand banks to allow them to continue lending at higher rates.
In both the ASB and Westpac cases while the dividend paid was higher the subordinated debt had also increased.
ANZ was the only one of the four to pay a dividend to the parent and not borrow the money back.
Tripe said this was unusual and may be because it had been expecting to sell its subsidiary UDC Finance and use that money. The sale fell through this year after it was turned down by the Overseas Investment Office.
Although a lot of money was going to Australia, Tripe said, “We chose to sell the banks to the Australians.”
Paul Glass, managing director at Devon Funds Management, said New Zealand was somewhat unique as a sovereign nation in that most of its major financial system participants were entirely foreign owned, mainly by Australian firms.
“There are a number of historical reasons for this but a contributing factor was that Australia had much deeper capital markets . . . That has been partly rectified in NZ by the advent of Kiwisaver.”
He’d like to see the NZ operations partially listed on the NZ Stock Exchange.
“We think investor demand would be strong, it would allow NZ investors to directly access the growth and divi- dends of the NZ banks, it would provide tax advantages due to receiving fully imputed dividends, it would provide muchneeded breadth to our equity market and it would help improve NZ’s capital account.”
NZ Bankers’ Association chief executive Karen ScottHowman said the dividends paid to the parent companies needed to be put into context.
“Our banks make a net contribution to the New Zealand economy just by operating their businesses here.”
She said they contributed about $6b to $7b to the New Zealand economy every year and employed more than 25,000 people.
Scott-Howman said banks were also an essential part of New Zealand’s communities.