Kiwi banks pay $3.5 billion to Oz parent firms

Business Editor·NZ Herald·

6 Feb, 2018 05:00 AM5 mins to read

New Zealand's major banks paid nearly $3.5 billion to Australian owners last year. Photo / 123RF

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 for 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 - the country's largest bank - paid the biggest dividend at $1.695b to its Australian parent in the year to September 30 - that was up from $1.36b the prior year.

While ASB paid the smallest dividend at $450m although that was still more than double the $200m it paid in the previous year.

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 New Zealand's current account deficit.

The deficit means we earn less from the rest of the world from 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 four out of every five dollars of New Zealand's current account deficit in the year to March 2017 - $6.3 billion compared to $7.7 billion.

The banks are also behind New Zealand's high international debt levels - of New Zealand's net international debt of $287.8 billion at the end of September 2017, $112.8 billion was owed by the banks.

Borrowing from overseas allows the local banks to lend out more than the amount that 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.

David Tripe, a banking expert at Massey University, said while it appeared a high amount 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 New Zealand subsidiary.

"There was no recycling by the ANZ in 2017. BNZ there was definitely recycling."

While the BNZ paid $700 million in dividends to its parent National Australia Bank, NAB lent $900 million 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 the 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, he said.

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 maybe 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.

While a lot of money was going to Australia, Tripe said : "We chose to sell the banks to the Australians."

Paul Glass, executive chairman 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, predominantly by Australian firms.

"There are a number of historical reasons for this but a contributing factor was that Australia had much deeper capital markets, a situation that has been partly rectified in NZ by the advent of Kiwisaver.

Glass said he would like to see the New Zealand 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 dividends of the NZ banks, it would provide tax advantages due to receiving fully imputed dividends, it would provide much-needed breadth to our equity market and it would help improve NZ's capital account.

New Zealand Bankers' Association chief executive Karen Scott-Howman 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 the banks contributed around $6 to 7 billion to the New Zealand economy every year and employed more than 25,000 people.

"They spend around $5 billion running their businesses here and pay around $2 billion in tax.

"Banks invest heavily in New Zealand and shareholder returns are crucial to maintaining that investment.

"This investment, both foreign and domestic, and access to overseas funding, underpins New Zealand's economic development by supporting businesses and households.

Scott-Howman said banks were an essential part of New Zealand's communities.

"They provide a range of financial services, are a significant employer, and purchase a range of local goods and services – all while giving back through sponsorship and volunteer projects."