O'Sullivan: Alliance the only choice for Jim's bank

By FRAN O'SULLIVAN

ASB Bank chief executive Ralph Norris and Deputy Prime Minister Jim Anderton should talk.

After sifting through the "People's Bank Papers," it is obvious to me that New Zealand Post is wasting time and resources in setting up a fully fledged - but hugely risky - retail bank.

A raft of official papers released just before Easter discloses that the People's Bank would not get off the ground without a big cash injection from the Government, a fail-safe exit strategy and, despite all the official denials, an implicit shareholder guarantee.

NZ Post could not even finance the bank off its own balance sheet. Its assets were not sufficiently liquid to make debt funding an option. Floating the new bank - before it was fully established - entailed competitive risk as the share prospectus would of necessity outline much of the detailed planning for the operation.

Not to mention the political risk that foreigners might buy a slice of the action. An outcome that would make it difficult to promote the bank on the type of xenophobic grounds necessary if Anderton is to make political capital out of its launch in an election year.

All these options were canvassed during the lengthy negotiations between NZ Post's shareholding ministers, their official advisers, the Post board and the Deputy Prime Minister, who wants the newbank as an Alliance trophy.

A float has not been ruled out, if the new bank is successfully established.

But the overall picture is one of risk, rather than opportunity.

NZ Post's establishment board could continue down the path of setting up a new, standalone bank. The cabinet has approved that option with a few caveats.

Chairman Ross Armstrong says discussions are being opened with the Taranaki Savings Bank and its Southland counterpart to look at potential partnership opportunities.

But it would make more sense to go straight to the endgame: form a joint venture with ASB Bank, or another fully fledged trading bank, and leverage NZ Post's extensive branch network to create new profit streams for both businesses.

ASB's parent has formed just such a strategy with Woolworths in Australia.

Tucked away in the trends analysis within the Cameron report, an independent review of NZ Post's business case for the new bank, is this gem.

The Woolworths initiative involves a joint venture with the Commonwealth Bank. CBA views this project as part of its channel development strategy, enabling it to shift unprofitable branch customers to a lower-cost channel while maintaining a relationship with these customers. Woolworths views it as a way of acquiring new (banking) business and sales by leveraging its brand and retail network, while securing the banking expertise to successfully develop the opportunity.

A joint venture with the savings bank minnows is not going to provide the People's Bank with the critical mass or national coverage an alliance with a fully fledged trading bank would provide. There are valid competitive reasons to do so.

WestpacTrust is considering just such a strategy with The Warehouse in New Zealand - a move which is likely to hit the market before the People's Bank gets off the ground.

The Auckland-based ASB Bank also has an excellent reputation for customer service. Unlike WestpacTrust and ANZ Bank, the Commonwealth Bank subsidiary does not feature strongly within the welter of market research NZ Post has available to it, which suggests that up to one million New Zealanders are dissatisfied with the service their banks provide.

Armstrong says NZ Post needs 100,000 New Zealanders to open accounts with the People's Bank - just to break even. It will take 150,000 new customers to get into profit.

Forming a partnership with an Australian trading bank might be difficult politically for Anderton. The Alliance leader has milked the "Australian bankers are bastards" slogan for all it is worth. But a quick study of the New Zealand Government's track record in the financial sector illustrates why the shareholding risk for a new banking venture should stay with the private sector - not the taxpayer.

Although registered banks in New Zealand are not explicitly guaranteed by either the Reserve Bank or the Government, if a major banking failure occurs both institutions are likely to play a role, if only to protect the integrity of the financial system.

The Government has an abysmal track record as a bank shareholder.

Although it did not directly guarantee the Bank of New Zealand, as the major shareholder, it had to step in with two major bailouts in two years to prevent a failure.

International bondholders forced it to lead a major settlement when DFC New Zealand closed its doors. Again there was no explicit Government guarantee - but there was an implicit obligation.

Reserve Bank Governor Don Brash raised the flag on potential Government risk last November. Writing to Finance Minister Michael Cullen, he warned that even for a relatively "vanilla" banking operation, financial market price movements could result in exposure to large losses.

He gave the former Government-owned Post Office Savings Bank as a case in point. Neither the POSB nor the then trustee savings banks would have been viable without explicit Government guarantees once controls on interest rates were lifted in 1984.

Brash points out that rapid expansion is one of the leading indicators of failure among financial institutions.

The huge capital leverage employed by banks means losses can quickly snowball if the bank's books get out of alignment.

The Government has prevented NZ Post from targeting corporates as customers for the new bank - but the competitive risks are still high.

But the fact remains that the Crown or taxpayer will be tail-end Charlie for this bank.

As Armstrong noted in a letter to the Finance Minister, NZ Post was not seeking a Government guarantee, but it might want to explore some form of letter of comfort or underwriting. Cullen ruled out an implicit guarantee.

But NZ Post's 100 per cent ownership effectively provides that assurance.