All it needs now is people

By RICHARD BRADDELL

MyBank, People's Bank, Kiwi Bank, Jim's Bank - the name has yet to be decided.

But the new bank to be set up by New Zealand Post is the most controversial thing in banking since Winston Peters hammered into the restructuring of the BNZ.

One thing is for sure, politicians of the right don't want it to be their bank should they come to power.

For them, it is the Left Bank, the creation of Deputy Prime Minister Jim Anderton, which is being indulged by his Labour Coalition partners as a reward for continued backing as the Alliance's electoral support dwindles.

If anything, the bank is the brainchild of NZ Post chairman Ross Armstrong, a former divisional chairman of the National Party, and his chief executive, Elmar Toime.

While Mr Anderton's role as champion has been the crucial element in getting it off the ground, the creation of a Mark 2 version of the old Post Office Savings Bank is founded in Mr Toime's belief that its separation from the Post Office in 1988 and sale to ANZ was flawed.

Dr Armstrong, encouraged by successful post office banks in places such as Holland, lent his support and the concept got its first serious research 2 1/2 years ago.

But if Dr Armstrong and Mr Toime believe in the project, they might be engaging in a folie a deux if the scepticism from the banking industry and other commentators proves well founded.

On the record, bankers are confining themselves to observations about the level of competition and their own ability to compete.

Off the record, their scepticism sometimes strays into scorn, although the quality of their arguments - or lack of them - might imply they are more concerned about the threat that the new bank poses to them than the consequences for the national accounts should it not live up to expectations.

One banker, who did not want to be named, was content to cast doubt on the new bank's ability to achieve its goals in the time frame set.

Asked if NZ Post's profit based on a threshold of a minimum 100,000 customers in three years was attainable, another banking source responded: "I won't want to answer that because that's commercially valuable to them."

NZ Post believes its target is readily achievable, saying it amounts to only two new customers a week apiece for the 321 Post Shops that will double as bank branches from early next year.

In theory, it will have a huge advantage. With a branch network twice the size of other banks, it should appeal to rural customers and those left stranded by bank branch closures in recent years.

It is also a well-known and trusted brand with high customer satisfaction in its core businesses.

But Massey University banking professor Chris Moore thinks it will struggle.

He believes the bank will have limited appeal in urban areas. Its greatest appeal in rural areas would be for small business transactional services, but it has said it does not intend to get into that market.

His colleague, David Tripe, worries that fees 20 to 30 per cent below those charged by competitors will prove a poor inducement to middle-income customers who seem to be its target market.

"I think they are going to struggle to get their customer numbers up because I don't think people who have got mortgages will find fee discounts tremendously important.

"The people who are attracted by fee discounts are the people who run up lots of fees, and they are not particularly attractive customers.

"Either way, I do not think it works particularly well."

Mark Colgate, a senior lecturer in marketing at Auckland University, also doubts the target is achievable. A recent survey on bank customer satisfaction which he co-wrote found that more than half of the respondents liked the idea of an NZ Post bank. But liking the idea and actually becoming a customer are different things, he notes.

Customers are notoriously reluctant to take their business elsewhere even when they don't like their banks, simply because of the enormous effort it takes to change mortgages, automatic payments and so on.

To achieve its target, NZ Post would have to attract between a quarter and a third of the 150,000 customers who change banks every year.

At present, those customers are more likely to go to the ASB, although clever marketing, playing on the local ownership theme, could attract many to NZ Post.

But in contrast to the broadly representative customer base NZ Post says it is aiming for, older people and dissatisfied customers come through in his survey as the strongest supporters, says Dr Colgate.

"The market they are going for is those people who are really interested in fees and charges. But once you get past a certain level of sophistication in terms of credit cards and mortgages, fees and charges become relatively irrelevant."

Federated Farmers president Alistair Polson believes farmers are also unlikely to be attracted, since they generally do their banking by phone or internet, or have their accountants do it for them.

"Many farmers I talk to haven't been inside banks for four or five years or more," he says.

"The banks they borrow from have client services managers who come out and do the deals on farm. It's basically not for them."

Farm employees are also unlikely to be attracted, he suggests, since they have also come to rely on credit cards and eftpos for their Friday night spending.

But NZ Post is adamant that its forecasts are conservative.

Exclusively targeting personal banking, it expects its offer of low fees and over-the-counter service backed by telephone and internet banking and automatic teller machines to be compelling.

But with New Zealand's salutary experience of banking in the 1980s, when the BNZ had to be bailed out by the taxpayer, it would be surprising if NZ Post had nothing to say about the worst-case scenario.

The Government has already said it will not bail it out. NZ Post has noted that "in the worst case, no customers of the bank would lose their money."

This has been interpreted by some as a guarantee by NZ Post, but that seems unlikely. Instead, it is saying that it will manage an exit from the industry in such a way that the assets and customer base are sold to a competitor.

But how credible are such undertakings? The short answer is that even in the banking crises of 1980s, no depositors lost their money.

And the banking environment is vastly different from then, when accounting and reporting standards were lax and banks were able to bury losses until they were no longer sustainable.

A revised supervisory system set up five years ago relies on a stringent set of quarterly disclosures that should provide an early warning of financial difficulties.

The ratings agencies will also be on the bank's case. Standard & Poor's, which knocked NZ Post's rating down a notch in December because of reduced profitability in its core business, took it down another notch this week after the confirmation that it would enter the banking business.

In cutting NZ Post back to a still respectable AA-, S&P said that while the bank would be financed by a capital injection from the Government and not from its own resources, NZ Post's business risk would rise once it entered the highly competitive banking market.

Indeed, New Zealand's banking market is among the most efficient in the world.

It is also among the most profitable, with foreign-owned banks sending home the best part of the $1.5 billion in profits they made last year.

That profitability, alone, implies that NZ Post has a good measure of headroom to sneak under and still achieve its goal of an 11 per cent return on capital.

But the best indication of success that NZ Post can give is its own record.

It has previously boasted about having the lowest-cost letter rate in the developed world, and has provided a reliable and efficient service, returning the Government $510 million in dividends since 1987.

In fact, with its lean equity-to-total-assets ratio of 36 per cent, it could be argued that some of NZ Post's weaker performance in the past two years could be due to the $125 million in special dividends paid to the Government in 1996 and 1997.

NZ Post has not been content to be a simple provider of postal services.

As well as gaining a leading position in the courier market, it has kept a weather eye on developments in e-commerce. With the Government's anti-privatisation stance, it must look elsewhere to make money or risk atrophy. In that context, if the banking option is feasible, then the case for proceeding is strong.

But if it is to really make money, it must become a force in the mortgage market, where profit margins are fattest and lending risk is low.

With no deposit base at present, it will depend heavily on wholesale money to finance lending for some years. And the cost of that money has gone up after the ratings downgrade.

Furthermore, the $78 million seed capital will not result in a huge bank. It should be enough to support a bank with assets of $1 billion.

In the sure knowledge that it will be crucified if it fails, NZ Post must hope the bank gets much bigger.

And, contrary to rhetoric about it potentially becoming a drain on taxpayers, a sign of its success will be that it needs more capital to pay for expansion.

Hopefully, that can be done out of NZ Post's earnings.