Taking Stock 28 August 2025

NZ shareholders in our big banks can relax.

The banks seem to have had three pieces of good news in recent days, perhaps explaining the recent lift in bank share prices.

The first good news is the apparent decision by the Reserve Bank of New Zealand to ease off its demand for higher bank capital (by 2028).

The second item is confirmation that the parliamentary select committee investigation into banking practices has reached a sane conclusion that in effect means banks will continue to operate as they choose.

The third item is somewhat less obvious but relates to a British High Court decision not to enforce penalties for banking errors, at the level spelt out by idiotic law.

It was during the era of Adrian Orr (RB CEO) and Robertson (Minister of Finance) that banks were instructed to increase capital from 10% to 18%, incrementally by 2028.

This directive had several purposes.

Robertson wanted to introduce a deposit guarantee for retail investors. It made sense to force banks to hold more capital to reduce the likelihood of a bank collapse, and thus any call on the guarantee.

Once an unhappy Westpac bank executive, Orr had little sympathy for Australian banks and as long as two decades ago was being described in the most vulgar terms by Australian bank executives. Orr knew the pathway to their nostrils.

He wanted the banks to hold much more capital, in fear of the Australians behaving like ockers in the event of a banking crisis.

The result of much more capital to support loan books could have been a significant dilution for shareholders, an inconvenient new commitment forced on Australian banks, or a shrinkage in lending, or all three.

The latter would inevitably have led to higher margins. Less supply (restricted lending) would force good borrowers to pay more interest. Banks do not like shrinking. Growth is their natural setting.

Orr has now gone, as has Robertson.

The Aussie banks have loud advocates, John Key having been an ANZ chairman (in NZ), and Therese Walsh being the chair of ASB Bank. Key of course has wisely retired. He never was an appropriate chairman. In my view, neither is Walsh.

Both Key and Walsh had chaired Air New Zealand when our current Prime Minister, Christoper Luxon, had been CEO of Air NZ. At very least, they both live in Luxon’s circle. Indeed, the capital city believes Walsh is being lined up as the next Governor General, a post that thankfully might lead to a new ASB chair.

Recently Luxon confirmed he talks to the Reserve Bank about his preferences, in RB policy, without, of course, interfering with the independence of the RB. (He is not Trump.)

My guess is that one way or the other, the Australian banks will have had their views noticed by Luxon and the RB.

Ironically, the banks are being allowed to take on a riskier profile (less capital) at a time when the global market is fearing bank instability, perhaps initiated by the growing likelihood of major failures in the new private credit sector.

To me the private credit sector looks similar to previous non-bank lenders, evoking memories of the 2006-2010 collapses, our mortgage trust and finance companies being an example of what happens when liquidity is threatened, when supply of new money falls, and when a high percentage of loans are to related parties.

The Financial Times informed us this week that 70% (approx.) of all private credit loans are to related parties, that is private equity funds that are struggling and need sympathetic lenders.

I ponder whether 2025-26-27 might be a time when we would be happier if our banks were over-capitalised.

Whatever, the indication is that banks will not be forced to arrange more capital and thus will be more willing to take on risk in search of growth, margins, profits, dividends and, pardon me, executive bonuses.

The select committee’s conclusion seems to acknowledge that banks must be free to perform their own risk analysis, set their own margins, and to ignore the lobbyists wanting banks to be more regulated.

Unless we as a nation wanted centralised planning and the form of socialism (communism?) visible in places like China and Russia, it always seemed probable that no wise group of politicians would pretend to dictate bank lending policies.

Key and Walsh will no doubt have privately urged this sort of conclusion. I agree with them. Banks have a social licence that is important, but banks are owned by shareholders who display no enthusiasm for socialism.

If banks want to lend to medicinal marijuana processors or to brothels, or to any high-risk proposition, the decision should be theirs, providing the loan is legal.

The third potential victory for the bank is somewhat more obscure but it centres on the unresolved penalties banks in NZ must pay when they made disclosure errors between 2014 and 2019.

During that period, Key’s government introduced poorly designed law aimed at backstreet lenders. Because of the poor research and law design, the major banks, which are not rip-off merchants, were subject to the new laws aiming to curb backstreet lending.

The penalty for disclosure omissions or errors was identified by the poor law as being a compulsory refund of all fees and interest collected right up to the day the error or omission was identified and corrected.

The banks were careless, often making trivial breaches, culminating in a theoretical liability for the ANZ and ASB of a large figure, perhaps a few hundred million.

Whether it was Key or Walsh (or neither) who brought attention to this unreasonably high penalty is not relevant. The banks grossly exaggerated the sum, seeking to create outrage and panic over the phony figures they created.

The outcome of the discovery of the unreasonable penalty was that Luxon’s government sought to change the law retrospectively, cutting in front of a brewing legal case aimed at claiming under the law a large sum for affected investors.

A litigation funder would no doubt have settled for a figure much lower than the law prescribed but the retrospectivity of Luxon’s amended law seemed an even cheaper outcome for the banks.

The issue is still unresolved but in Britain this month an equally silly law relating to bank disclosure was tested in the Supreme Court. That court reversed a decision by the Court of Appeal, which had confirmed the ludicrous penalties.

The background was a sensible law requiring banks to disclose commission they paid to loan brokers, but an absurd penalty for banks who broke that law.

In the UK, banks provide discounted loan finance to car dealers, which in turn lend the money at a much higher rate to people who borrow to buy a car. They have done this for many years.

The banks did not disclose this. They decided the “discount” rate was not the same as a “secret commission”. The courts disagreed.

Once the problem was identified the regulators assessed the banks were to be fined the amount they had not disclosed over the long period of non-compliance – a rather eyewatering sum of 44 billion pounds, easily enough to damage the stability of Britain’s banks.

Well, in August the Supreme Court confirmed that the banks had an obligation to disclose this “secret commission” but ruled the prescribed penalty was absurd, and the penalties inappropriate.

Will this decision be relevant to the ANZ and ASB in NZ, as they attempt to escape from the prescribed penalty for their careless disclosure issues here?

I continue to advocate that the retrospective law be discussed in our own court. I accept a settlement might end the matter and leave the law to be changed without what seems an undemocratic outcome for those who contest the extant law.

The banks have had a good month in August. It would be even better if their political clout can result in escaping the prescribed costs of their disclosure errors.

The share price rises of all the listed banks reflects this. (It can hardly reflect better economic conditions.)

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WHEN Trump recently named various cities in the USA as “hell holes” he undertook to send in the national guard and various state law enforcers, choosing the states to supply from places that were not hell holes.

One of those he tapped for support was Ohio, presumably not a hell hole.

Well: some may beg to differ.

They may either have read the non-fiction book “Dark Money” or they may have watched a riveting documentary identifying the grim mix of US state government corruption.

Many of us who have observed US politics would not be swept away by the book or the documentary but, as Trump sets the US agenda, it might be worth it to record what happened in Ohio.

This racketeering centres on Ohio’s Speaker of the House, a house dominated by Republicans, with a controversial character, Larry Householder, being that speaker. The speaker has the power almost of a king.

The scandal was enabled by an Ohio state bill which allowed people or corporates to retain anonymity when they donated via an established 501(c)(4) trust to any political campaign.

In effect this trust blocked any transparency as to who was donating to politicians. The trust could do what it liked with the money.

The Ohio nuclear energy provider First Energy had been on the verge of bankruptcy when Larry Householder announced a state subsidy of $1.3 billion - of tax-payer money - to First Energy.

What he did not announce was that First Energy contemporaneously donated $61 million through this 501 device, the money in the trust controlled by Householder who, as Speaker of the House, controlled legislation.

The $61 million of First Energy money was used to support Republican electioneering, spread amongst 21 candidates to promote themselves and denigrate the rival candidates.

As an aside, in the US, 91% of all election campaigns are won by the individual with the largest advertising budget.

Armed with this money, the Republican candidates dominated, pledging their support for Householder in return for the cash in the 501 trust that Householder controlled.

Elected as Speaker, Householder then had support for his plan to allocate $1.3 billion to First Energy.

The link between the First Energy donations, Householder, and the ultimate huge sum given to First Energy, was proven in court thanks to the admirable work of a small but tireless team in the FBI.

Householder was tried and sentenced to 20 years in jail for racketeering.

He had been an energetic supporter of Trump and a large advertiser, supporting the Republicans to defeat Joe Biden, Trump winning the state by a full 10% margin.

First Energy was fined $3,860,000 as a civil penalty, and a criminal fine of $230 million, probably among the largest criminal fines imposed on a corporate in US history.

The grubby saga had uncovered dreadful state law (anonymity for political donors), appalling abuse of authority, widespread corruption, and American corporate chicanery.

The documentary and book are both available for those who find this story hard to believe.  I watched the documentary on a Singapore Airlines long-haul flight.

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THE Fonterra chairman Peter McBride, CEO Miles Hurrell, and former director Leonie Guiney should be receiving a sackful of Xmas cards this year.

The successful sale, at an unexpectedly large price ($4.2 billion), of Fonterra’s consumer brands, will result in large sums being returned to Fonterra suppliers.

There are around 10,000 Fonterra suppliers.

If half of the $3.2 billion was shared based on the quantum of milk supplied by 10,000 suppliers, the average receipt would be $160,000, a sum that in most cases ought to be applied to debt, or to improved infrastructure. It is likely the other half of the proceeds will go to Fonterra shareholders who are not milk suppliers. I have not discovered details of the split.

Henceforth the Fonterra supplier shareholders would receive lower dividends, as a result of the sale of the branded products to the new French owner.

McBride, Hurrell and, earlier, Guiney have made an impressive difference to Fonterra, a co-operative which had regularly made appalling decisions, often with ego-based decision making, often lacking competent risk analysis.

Fonterra now reverts to its true base, that of a co-operative whose task is to collect milk, treat it with high processing standards, and supply it to others around the world in the form they choose.

Guiney is the director who stood tall a decade or so ago and fought the chairman and directors whose grandiose plan threatened to sink Fonterra.

Many will recall the unwise purchases, the excessive use of debt, the quite ridiculous executive salaries, and the lack of robust risk analysis. Massive capital losses resulted.

Guiney was isolated by many directors, kicked off the board, and even sued for imagined offences. She is a dairy farmer, not one of those who achieve directorship through playing the diversity card.

When fired she fought back, won the farmer vote, and was placed in the uncomfortable position of being on a board that had fired her.

She kept up her campaign for better governance. She won.

Now retired as a director, she would have felt comforted when McBride, nothing like previous chairmen, implemented sane governance and with the help of a competent CEO went about converting Fonterra back to its deserved status as one of our most important organisations focussed on areas where NZ has a comparative advantage.

Guiney and her talented, energetic husband Kieran, have been active in training and development, made regular important contributions to their community as well as to the dairy industry, and have four fine kids, at least two of whom will be dairy farmers.

No New Zealander should forget the importance of Fonterra.

It may soon return to being New Zealand’s most admired company.

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Travel

Our advisers will be in the following locations on the dates below. 

11 September – Ellerslie – Edward Lee

12 September – Albany – Edward Lee

24 September – Lower Hutt – Fraser Hunter

3 October – Tauranga – Johnny Lee

7 October – Palmerston North – David Colman

8 October – Christchurch – Johnny Lee

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