Reports give NZ Post's bank a slim chance

By RICHARD BRADDELL

Official papers released yesterday have done nothing to dispel doubts over the likely success of NZ Post's banking plans.

While Treasury and Crown Company Monitoring Advisory Unit documents released by the Government and NZ Post indicate that the risk of losses will be firmly managed, the overall tone is that the new bank, currently referred to as Newbank, is unlikely to be a glistening success.

The tenor of negative advice was foreshadowed last week by NZ Post itself when it admitted that consultants Cameron & Co felt that the bank was unlikely to meet its base case forecast and could miss achieving its risk-adjusted required return on capital of 11.7 per cent.

That would result in an economic loss of $5.7 million over 10 years in net present value terms.

But NZ Post chief executive Elmar Toime said yesterday that that still represented an accounting return on equity of 9.9 per cent.

NZ Post has worked on the basis of a net present value gain of $70m over three years, on the assumption that it gets 175,000 clients.

But the Cameron report, included in the papers made public, suggests that the bank would struggle to get a break-even 100,000 customers.

"We believe there are major uncertainties relating to Newbank's ability to secure the size and quality of customer base assumed in the base case given the value proposition (fees, interest rates and service combination) planned to be offered to customers," Cameron & Co said.

"We simply do not regard the value proposition as sufficiently compelling to produce the projected customer results."

The Crown Company Monitoring Advisory Unit took an equally bleak view."We consider that the business case is not compelling. Forecast strong rates of return are counterbalanced by considerable associated risks," it said last October.

"In particular, we consider that the risks around assumed competitor response and customer switching are high."

It noted that although NZ Post had done extensive analysis, its assumptions and projections were inevitably subjective.

Asked yesterday if it was unwise to proceed with the proposal given Cameron's view of its likely return, Finance Minister Michael Cullen said that mathematically there was only a 50 per cent probability it would miss its required 11.7 per cent return on capital.

Furthermore, considerably more work had been done refining the plan since the Cameron report, and a number of issues raised by it had been more than adequately resolved.

"NZ Post has responded with changes to the business plan in terms of things like the exit strategy. They have been fleshed out," Dr Cullen said.

"Of course, the final go-ahead is yet to be given. The establishment board of the bank will have to make the final decision on whether the bank proposal proceeds. That will be made in the light of no doubt updated knowledge about the state of market perceptions of likely customers."

Given the gradual development of the bank, losses are unlikely to be significant in the first two years and Mr Toime said that clear milestones that had been set against progress would be measured.

NZ Post believes the 100,000-customer hurdle is easily achievable since it is a very small proportion of the customers who in surveys have said they will switch.

In a January letter, chairman Ross Armstrong also said the bank would add another valuable arm to its international consultancy business with the two major sales of the bank's systems enough to cover its development cost of business systems.

"This upside potential has not been factored into the business case and was not considered by Cameron & Co," Dr Armstrong said.

"The range of additional revenue streams which can be accessed through the banking business once it is established are considerable."

However, Dr Cullen said the Government had sent NZ Post a strong signal that it would not bail out Newbank if it got into trouble. It is putting up $72 million of Newbank's seed capital and forgoing $6 million more in NZ Post dividends.

Rejecting proposals that the Government inject perhaps $53 million, with NZ Post raising debt for the rest, Dr Cullen said that in his judgment it was better to have a one-off capital injection that gave a clear message to NZ Post that there would be no more.

"There is not an ongoing commitment for capital injections."