Taking Stock 5 June 2025

It seems reasonable for many investors who factor into their decisions the likelihood of political change to consider the probability of an imminent period when the two relevant political parties will be headed by Nicola Willis and Barbara Edmonds.

Both seem to be skilled at presenting their ideas and both seem to be motivated about the need to change our approach to spending; call it fiscal responsibility.

Many of us will be hoping that if they do inherit party leadership they both focus on changes to our national superannuation, recognising that it is unaffordable, and acknowledging that for many people 65 is no longer a relevant age at which to stop earning, and rely on welfare from the state.

Means testing and having variable ages at which to receive the pension would seem to be a topic on which the two logical, intelligent women might reach accord, removing the subject from political debate.

There are several other areas where they might find common ground.

One obvious area is banking.

For at least a decade, the cognescenti in the foyers of power have had on their dream list the creation of a large New Zealand bank, competing with the Australian banks, which collectively control around 85% of NZ banks.

I am not one to abuse the Australian owners. Strong resilient banks have regularly underwritten NZ living standards by negotiating us through disasters, often man-made disasters.

But a strong NZ banking entity would provide real pricing tension and might put an end to the often silly claim that bankers are "ripping off" New Zealanders.

Is now the time for Willis and Edmonds to meet over a green tea and a seaweed muffin to find common ground and agree to bring about change, when (or if) they become the leaders of out two major parties?

Kiwibank is currently owned by the Crown, having flirted with others like the ACC and the NZ Super Fund as a means of growing its capital.

It started out as a bank for low-value customers, the bank operating from bleak surroundings in NZ Post offices, probably more like a bank in Bratislava or Budapest than in Sydney or Melbourne.

Queues did not appeal to those with options to bank elsewhere.

Governance was sometimes of third-world standard, as were some of the bank’s policies, but gradually it matured, attracted some keen minds and is today a small but effective bank, with maybe 12% of the country’s banking business.

The Labour government bought back minor shareholdings from the other Crown entity owners and pledged that Kiwibank would remain in government ownership.

Willis and Edmonds might have the selling skills to persuade the country that there is a much wiser option for Kiwibank than being wholly-owned by a shareholder that has no desire to allocate more capital to fund growth.

The option is obvious, as it was ten years ago when NZ was locked into lazy leadership.

The answer is to merge with a listed bank (Heartland) and buyout three hamstrung unlisted banks, TSB, SBS and The Cooperative Bank, to form the Crown Bank of New Zealand.

The merged entity could remain majority-owned by the government, though if political leadership were wise the new entity would not be forced to have political appointments dominating board numbers.

The four new players would add only a few percent to the combined share of the banking market, but they would achieve for New Zealand a listed bank with access to capital and with the goal of competing with the Australian banks, making profits and providing dividends for all shareholders.

Furthermore, the transaction would greatly enhance the survivability of the likes of TSB, SBS and The Cooperative Bank, none of which can rely on access to new capital.

Of these banks, the TSB is community-owned, the ownership in a community trust structure.

TSB also owns a share of Fisher Funds, which has grown by buying the Kiwibank’s Wealth Management business, originally bought by Kiwibank from Gareth Morgan Investments. Fisher Funds is managed by the former MP Simon Power.

The other Fisher Funds owner (34%) is the American fund manager, TA Associates.

In effect, the TSB’s community trust, comprising directors hardly likely to be skilled in wealth management, have allowed TA to run Fisher Funds.

TSB Bank is a careful, low-risk, low-profit bank, its risk aversion acknowledging its lack of access to capital.

It focuses on unthreatening home mortgages at low margins.

Its profitability is thus constrained but it is highly regarded by its customers and rarely challenged, albeit now embroiled in an argument over responsibility for clients who lose money to scams.

SBS is smaller, a bank that was a building society, again without commercial shareholders, yet also trusted and stable, with a focus on low-risk, low-margin lending.

The Cooperative Bank has had a hairy history, saved from receivership by the good work of Bob Stannard in the 1970s when it had insurmountable liquidity problems.

At that time it was a cooperative, funded by its public service clients, lending to its public sector borrowers. It had no shareholder and thus no access to capital.

Known then as the Public Service Investment Society (PSIS), it was expected to return bonuses to its depositors, rather than accrue surpluses to build resilience.

Stannard did a remarkable job reconstructing the PSIS.

Like SBS, The Coop Bank profits are lean, its focus also on low-margin lending. Its capital access is zero.

So these three banks would collectively add billions of loans and deposits to Kiwibank, creating ample opportunity for savings through efficiencies.

But the real prize would be the link with Heartland Bank which, within another three years, is likely to be contributing nearer $200 million of surplus per year.

Heartland, itself an entity grown from multiple smaller companies including Marac Finance, now has ample capital and a shareholder strong enough to stave off any marauder looking to exploit its low share price as it transitions to an Australasian lender.

It bought Challenge Bank in Australia to access the Australian Government Deposit Guarantee, enabling Heartland Bank to reduce the cost of its funding because of that guarantee, which makes all banks “equal” for retail depositors.

Unlike New Zealand, the Australian guarantee was not available for non-banks, so the acquisition was in effect a payout to the Challenge owners in return for a long-term reduction in funding cost, thanks to the guarantee.

It will not be until 2028 that the last of the more expensive deposits have been cleared out but the nett result by 2028 will be a funding saving of around 1.75% on what by then might be a $3 billion loan book.

This saving would equate with an interest-rate saving of around $52 million a year.

Other synergies, growth in its Australian and NZ lending, and a fine tuning of its unwise matrix lending in NZ should enable Heartland to achieve the level of profit that its directors have forecast for 2008 — $200 million, with an implied dividend of perhaps 12 cents.

If Kiwibank merged with Heartland, used Heartland’s listing, acquired three hamstrung but tidy regional banks and cut banking duplications, it would not be hard to envisage a NZ Bank majority crown-owned, earning more than $500 million after tax per year, perhaps nearer $750 million in its second year.

The new merged entity would be one of the most profitable companies on the NZX, most certainly in the top ten by that criterion, and would attract strong fund manager support.

It would be a source of revenue to the Crown and would add a tension to the pricing of many bank products, yet still be required to have some sensible social policies.

To get there would require political support from the two major parties, to overcome the opposition from uncommercial ideologues who the MMP system delivers to the Beehive.

That might seem awkward given the leadership today but if there were tacit respect between Willis and Edmonds, and if it takes two smart women to display genuine care for the betterment of NZ, there may be a chance!

If they could concurrently reshape national super, and bring to an end to idiotic subsidies for the well off, a much stronger NZ balance sheet could be achieved, without adopting any shades of communism.

The required political cooperation could start tomorrow, with Willis and Edmonds displaying the necessary maturity to put New Zealand’s welfare ahead of blue or red nonsense.

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Fixed interest investors will have become well accustomed to the retail funding strategies of Infratil, the highly successful investment company which was created by the late Lloyd Morrison and listed on the NZX in 1994.

As an admirer of Morrison, I supported his listed company from the outset and have been well rewarded both by share price growth and by a consistent flow of bonds. Infratil is the company most supported by our clients.

Infratil by now will be approaching $2 billion of bond issuance, putting it up the top end of all NZ bond issuers.

Having learnt through his failed company, Omnicorp, how banks panic in tough times, Lloyd Morrison determined that Infratil would escape future bank panic by funding largely from a retail base, thus avoiding the sort of covenants that are brutal during bad times.

He appointed a money market-trained young man (at that time), Tim Brown, to manage the funding of Infratil’s required debt. (Brown, now in his mid-60s, has retired.)

Brown did a great job in most cases, accepting that the pricing of the bonds (the coupon rate) would have to be set at a level that acknowledged Infratil’s lack of a credit rating.

Morrison had always been cynical about the methodology and therefore value of credit ratings.

Curiously thirty years later, we are again learning a lesson about credit raters as Taking Stock will discuss in the near future.

The problem now for Infratil is that many of its faithful borrowers are just about replete with Infratil bonds , some like me, probably over-indulging with exposure that borders on the highest level allowed by any normal diversification guideline.

Rules can be flexible but are sane reminders of the value of diversification.

Infratil in 30 years has never caused any alarm for its followers and remains one of New Zealand’s best public companies, likely to be our biggest in terms of market capitalisation, given that the Australian banks are a secondary listing.

As a result, its bond issues are always fully bid, its latest issue this week being overbid by a level that forced Infratil to scale all broker requests.

What this means is that many retail investors will obtain less than they bid, scaling often occurring at extreme levels, despite Infratil not being considered by those fund managers who pledge to buy only those bonds subjected to a credit rater’s investigation.

The bidding was lopsided for a reason.

Those brokers with client permission to invest as the brokers see fit, sometimes bid for the whole of an issue, knowing that if by some miraculous event they were allotted the whole issue, they could simply stuff the bonds into the accounts of those clients who have handed over the investment decisions to their broker.

If a broker really wanted, say, $30m of bonds but bid the whole $75 million of an issue, it would create a scaling exercise that means all the honest bids became swamped. If the “bids” total $225 million, including the false bids, all brokers would receive 33% of the sum allocated.

Years ago I pestered the Financial Markets Authority and the NZX to consider quite how a broker could dump excess stock on those clients the broker did not have to consult.

However was such behaviour in the best interests of the client? Was not the broker abusing the privilege of using other people’s money to manipulate the scaling process?

That issue was never addressed.

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Bond issuesInfratil confirmed yesterday that its 7-year senior bond, will have a fixed interest rate of 6.16% per annum. This was set slightly higher than the minimum interest rate, with Infratil covering the transaction costs (resulting in no brokerage payable by clients).

Clients who would like this bond should urgently contact us for an allocation.

Payment will be due no later than Friday, 13 June.

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Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners