Taking Stock 28 February, 2019
The Tax Working Group has made its final recommendation to the Government, which now faces a daunting task.
Reams of virtual paper have been produced over the past week detailing reactions to the release. As with all suggestions of change, the response has not been universally enthusiastic.
The first point that should be made is that the recommendations are not laws now in place, nor necessarily an indication of the intentions of the coalition Government. The working group was given a specific framework to operate within (for example, being asked not to consider a tax on the family home) and broadly remained within these parameters. The Government intends to issue its own response in April, which may give investors a clue as to the direction of the wind.
A second point is that the recommendations do not even appear to be a consensus of the members of the group. Three of the 11 carefully-selected members did not endorse the recommendations.
With these points made, several conclusions seem likely.
Firstly, it is highly improbable that all the recommendations will translate into enforceable law in two years’ time. It would be political suicide. The scale of change is too dramatic, and the degree of voter 'buy-in' is too low. The impetus for change seems weak, and the initial response too negative for an electable Government to pursue the full extent of the measures suggested.
The suggestion that some of the changes could be adopted, and others disregarded, is also fraught with danger. One would question the point of a working group to research an issue, and offer a solution, if only to have most of the suggestions disregarded completely and the remaining cherry-picked for political expediency. It would imply a greater understanding of the tax system than the people appointed to research it.
That being said, some of the suggestions are clearly better left to the realm of theory than practice. I would feel sympathy for accountants being asked to calculate the average square meterage used by flatmates within a home, when trying to calculate the proportion of a capital gain that is taxable. Such suggestions are unlikely to produce logical outcomes.
The second conclusion is that the current regime, where discretion is effectively left to the seller of shares as to whether they choose to pay tax on their capital gain, has correctly been identified as inadequate.
Under the current rules, a seller of shares is required to pay tax on their capital gain (or is eligible to claim a loss) if they identify themselves as a 'trader'. No specific definition exists for this label, beyond the intentions of the shareholder at the time of acquisition. Clarity around this issue should be welcomed.
The issue of ring-fencing is another that should be carefully handled. If the primary argument supporting a capital gains tax is that ‘’all income should be treated equally’' then a strong case seems to exist for investors to be permitted to offset their trading losses against their other, taxable income.
My final conclusion surrounds the impact on shares listed on the stock exchange.
The report suggests that all share sales be taxed, which will mean greater monitoring of purchase prices, especially when averaged over several purchases. It may also incentivise share investors to crystallise losses when selling out of other profitable positions, essentially eliminating their tax obligation. This outcome seems to offer a greater benefit to the broking industry than investors.
The most obvious impact to listed companies will surround the property trust sector, particularly those who pay unimputed dividends within a PIE structure. If their recommendations were to be pursued, Precinct Properties seems one particular company that would be penalised by these changes.
The Government’s task should not be viewed with any particular envy. There is no doubt that with growing life expectancies, increasing automation of the workforce, and a stubborn resistance to changes in superannuation entitlements, a different approach to taxation will be needed as a greater number of people reach retirement age, and a falling proportion of people exist to support them. Taxing labour becomes less effective with aging populations.
However, our (relatively) simple existing tax system offers distinct advantages over more complex designs, and the threshold for abandoning this simplicity should be very high.
For now, investors would be wise to wait until April, when the Government announces its response, before analysing any impact on their portfolios.
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Heartland Bank's half-year report was released to the market last Tuesday (19th). Since then, the share price has recovered more than 6%, but remains well below early December levels.
December was a poor month for NZX-listed banks, each falling around 10% following the release of a discussion paper from the RBNZ regarding potential changes to the capital requirements of NZ-operating banks.
Heartland’s result included the announcement of the 3.5 cent dividend, which will be paid on 29 March. Heartland had been paying an interim dividend of 3.5 cents and a final dividend of 5.5 cents for several years under its previous structure. There was no indication that this expectation should not remain.
The half-year result was an increase in net profit after tax of 6.5% to $33.1 million. There were several one-off costs that impacted this result, mostly associated with the ASX listing. Heartland also lowered its guidance for its full-year profit.
The impact of the Royal Commission's conclusion around the treatment of trailing commissions may also be worth following. A trailing commission is a fee paid by a lender to a mortgage broker, over the term of the loan, as compensation for referring a loan. Described in the Royal Commission's report as '’money for nothing’', it was found that some banks were using trailing commissions to incentivise brokers to apply for loans with a term that was longer than needed for the mortgage.
Heartland's '’core focus’' going forward is to continue the growth of its Reverse Mortgage business, which is primarily facilitated through mortgage brokers. The banning of trailing commissions may result in brokers having to adapt their model. Heartland itself is addressing this issue by increasing its role in origination of these loans, cutting out the brokers’ role. It anticipates launching a television campaign in Australia soon to market this product.
The RBNZ's proposed increase in capital requirements seems unlikely to be particularly impactful for Heartland. The proposal equates to approximately $15 million per year for five years. If Heartland were to increase its rate of growth, this number may increase alongside it. This seems probable. However, it does not anticipate needing to actively raise equity from shareholders, with the Dividend Reinvestment Plan instead seen as an avenue to achieve such an outcome.
Those who bought Heartland Group shares for the dividend should not be alarmed by recent falls in the share prices of the listed banks. While there is some fear around the changes impacting the sector as a whole, there are also significant opportunities for Heartland to leverage its expertise and grow.
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The Mainzeal trial has concluded and four directors have been fined $36 million dollars between them.
The directors, Richard Yan, Peter Gomm, Clive Tilby and former prime minister Dame Jennifer Shipley, were found to have breached their legal duties as directors, and allowed Mainzeal to trade while insolvent for almost eight years. The directors’ liability was covered by liability insurance for $24 million, two thirds of the award against them.
I imagine, in future, that insurers will more carefully inspect the track record of the people they are insuring. Premiums may reflect those with a poor record.
The construction sector remains troubled, and the wrong people are suffering from mistakes born out of mismanagement. Reports of construction being mispriced seem to be the norm. Cost blowouts almost seem to be expected. Those fortunate enough to be contracting for organisations with bottomless pockets (for example, the Wellington City Council) seem to be positioned best.
One hopes that the conclusion of the trial leads to better standards, both in the building industry and the boardroom. In my view, it further highlights the fact that politicians rarely offer the specific expertise that should be expected from directorship roles.
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Metlifecare's announcement this Monday included the statement that it may explore a retail bond offer, using the proceeds to replace bank debt and diversify its sources of funding.
No details around term or rate are yet known. Clients who have an interest in such a bond are welcome to contact us.
We will keep clients updated as the situation evolves.
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Argosy’s senior ‘Green Bond’ has been priced at a minimum of 4%, fixed for seven years.
Argosy has confirmed it will pay the brokerage costs, accordingly clients will NOT have to pay any brokerage costs.
Those who would like to participate in this offer can find a copy of the investment statement on our website. We also ask that you notify us of your indicative level of interest no later than Tuesday 5 March. An application form for this offer will be available on the 7th of March.
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Edward will be in Auckland (Remuera) on 8 March and in Wellington on 27 March.
David will be in Lower Hutt on 20 March.
Michael will be in Hamilton on 28 March.
Chris Lee & Partners
Taking Stock 21 February 2019
THE repayment in May by the Commonwealth Bank of Australia of ASB’s specified preference shares will raise some interesting questions for many investors.
Many bought these shares at prices between 70 cents and 90 cents and will be repaid $1.00 in May.
Will their gain be taxable, as it would be if the preference shares were deemed to be a debt instrument, like a bond? Or will the gain be regarded as a share price gain, taxable only in the hands of traders or those who bought them for capital gain?
Anyone having to rule on this dilemma should consider how the Crown viewed the preference shares of South Canterbury Finance, a similar instrument to the ASB security.
The SCF preference shares were excluded from the Crown guarantee of SCF debt securities. When the shares became worthless were all investors entitled to deduct their losses?
If the losses were not deductible, why would ASB preference share holders be expected to pay tax on the gain they may have made, if they bought the security at a discount?
That troublesome question will not arise when (if) Infratil ever repays its poorly designed perpetuals.
The Infratil security is specifically named as a perpetual ‘’bond’’, is not used to prop up capital ratios for credit rating purposes and was simply offered as a hedge for those investors who could envisage base rates rising.
As the rates are reset annually, rising base rates would have increased the interest paid. Of course, rates have fallen in the past 10 years, so the interest rates have fallen to a rate barely comparable with bank rates.
The design error made by Infratil was the perpetual setting of the margin (1.5%) paid over the base rate.
Credit margins always vary, and probably, in Infratil’s case, should have been 4% in 2009, and maybe 3% today, for a security with no promised repayment date.
The designers should have catered for this by allowing the market to reset the credit margin at regular intervals, say every five years.
Of course the tax laws are specific about profits made on bonds so the Infratil example would definitely be taxable if the company ever repaid the dollar owed.
I dislike the formula used by recent issues of 10-year bonds. Again, the resetting process occurs (after five years) at a predetermined margin.
There is at least a fair chance that as regulators force banks to de-risk, the margins at which banks lend in future might be higher. Indeed, I expect this to be beginning now.
Meanwhile those being repaid their ASB securities should prepare for fairly miserable interest rates when they reinvest the proceeds.
However, those who bought the ASB instrument at a discount will have a greater sum to invest, hopefully without IRD intervention.
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THE Motueka based fishing and food processing company Talley’s faces 14 charges over operating their trawlers in areas where fishing is banned for conservation reasons, in the Tasman Sea.
The bans are in place for a reason – to better manage and preserve fish stocks.
One imagines this must have been a rare blemish for a company that is sufficiently devoted to environmental issues that it protested loudly when Chatham Rock Phosphate first sought to hoover up phosphate pebbles in an area of the Chatham Rise with no special fishing relevance.
Talley’s concern also spread to the plans of Trans Tasman Resources, which sought to scoop up iron sands and rare metals off the Taranaki coast, in the Tasman Sea.
One imagines the company’s contrition over its alleged errors now will be consistent with the sentiments expressed in its opposition to others who wanted to dredge in significantly less sensitive areas.
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SOME many thousands of New Zealanders will never forget the melodious intonations of Douglas Lloyd (Somers) Edgar, on Radio Pacific in the 1990s.
Edgar was New Zealand’s blue-collar authority on risk investments, attracting large numbers of people who accepted Edgar as the workers’ source of investment knowledge, available to all on radio, at no immediate cost.
Edgar retired before financial advisers were required to be certified after displaying relevant knowledge and experience.
His Money Managers brand name disappeared, and most of his salesmen around the company left the scene, presumably reverting to real estate, insurance selling or Mr Whippy franchises.
Surprisingly, Edgar, now in his late 60s, has re-emerged.
A recent Christchurch Press edition displayed a classified advertisement inviting investors wanting double figure returns to email him about an opportunity with a Kiwibuild operator.
A polite email requesting details led to a polite response from ‘’Doug’’, with an explanatory brochure discussing this ‘’opportunity’’.
I guess the Kiwibuilder either had not heard of Harmoney or crowd funding or had not met their criteria.
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THERE will be many public company directors, and many retired politicians awaiting with keen interest Judge Cook’s decision on a case seeking large awards against the directors of the failed construction company, Mainzeal.
The company, partly owned by a Chinese investor, failed, costing its creditors more than $100 million, and its public shareholders the whole of their investments.
Many Chinese investors accord great respect for the mana of retired politicians, irrespective of their commercial experience, knowledge or acumen.
It followed, then, that the brief role as Prime Minister for Jenny Shipley led to an invitation to chair Mainzeal, a position I believed was totally unsuited for her, and said so at the time.
Construction companies face higher risk/return questions than many and accordingly have great need for industry trained people with personal experience of identifying potential problems and knowing how to solve those problems.
Mainzeal was an even tougher assignment as its major shareholder was inclined to shuffle assets in Asia, and was not averse to using Mainzeal’s lean cash reserves to switch into other ventures.
An experienced chairman, with genuine commercial expertise, would likely have seen this as a danger to be combatted and would have needed innate knowledge of a difficult area in commerce to address the nuances of this company’s behaviour.
The case against Shipley and her directors has now been heard, funded by New Zealand’s most credible litigation funders, LPF, chaired by a retired Supreme Court Judge and directed by activist Bruce Sheppard who, for all his humour, has often been a worthwhile and serious guard dog, protecting public investors.
The protagonists seek tens of millions of compensation, some covered by insurance, some to be met by the directors, personally.
Judge Cook’s decision will be relevant to many other than creditors, as well as the Mainzeal directors.
The decision should provide more clarity on matters like the accountability of directors, what skills they are expected to display, and perhaps, what sort of experience is needed to be of any use as a public company director.
We know from another recent court case that the law will protect directors who do see problems and take successful action to ensure that investors and creditors are protected.
In this case a director had been wrongly banned for five years but was able to have this reversed, a judge ruling that the director deserved credit for identifying management misbehaviour and forcing the management to put right the errors.
My view remains that chairmen and directors should never be figurehead roles, for people with no demonstrable commercial acumen.
Directors and especially chairmen need to bring relevant knowledge, genuine experience, proven good judgement, intellect and energy, taking their role as being the guard dog for all stakeholders, not just the major shareholders.
Judge Cook’s opinion will be well read, I imagine.
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LITIGATION funder LPF will also be awaiting eagerly the outcome of its successful prosecution of the Ministry of Primary Industries, for failing in its due of care to the kiwifruit industry.
MPI allowed the importation of virus-infected pollen, leading to disease-ridden kiwifruit vines and subsequent huge monetary losses, particularly in the Bay of Plenty.
LPF has potentially won many hundreds of millions, largely to be paid by insurance.
The insurance in itself was an interesting issue. MPT claimed it had no liability to growers. So why did it insure itself against liability?
The issue now is that MPI has indicated it will appeal the decision.
Sometimes this sort of response precedes a negotiated settlement. If MPI faced a risk of being liable for, say, $800 million, it might warn of an appeal, then agree to ‘’settle’’ for, say, $500 million.
Either way, I expect that if LPF won both cases, its war chest thereafter would be a really serious threat to company directors, auditors, trustees, receivers and government departments who fail in their duties of care to others.
LPF definitely is on a mission to level the fields, currently tilted against retail investors.
One essential ingredient that might have altered the dreadful behaviour of so many parties in the lead-up and follow-up of the global financial crisis was access to the courts.
Fear of accountability moderates behaviour when there is a high probability of court appearances, meaningful compensation, and binary sanctions.
A deep-pocketed litigation funder manned by people with expertise and energy, will be the source of nightmares for those who cheat, or are inattentive or incompetent.
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Edward will be in Napier on 25 February and in Auckland (Remuera) on 8 March.
David will be in Kerikeri on 4 March, and in Lower Hutt on 20 March.
Chris will be in Auckland on February 25 and 26.
Chris Lee & Partners Limited
Taking Stock 14 February, 2019
Last week’s sharp decline in swap rates (benchmark interest rates) should not have investors reaching for the panic button, but it may soon be time to begin some gentle stretches of their preferred button-pressing limb.
The 1-year, 2-year and 5-year swap rates reached record lows towards the end of last week, which carries various implications for investors. These new interest rate lows may be a surprise, because most commentators believed the next move was upwards.
Firstly, investments priced with reference to this benchmark, such as the current Trustpower bond offer, will be set at a lower level than previously expected (although these bonds have a minimum rate of 3.95% for the first five years). Whether this is simply fortuitous timing, or a new normal, remains to be seen. We anticipate the latter.
Another example would be reset securities, such as Quayside Holdings (QHLHA) which resets its interest rate every 3 years. It is due to do so next year, using a rate of 1.7% plus the prevailing three-year swap rate. QHLHA currently pays an interest rate of 4.32%. If reset today, it would be closer to 3.5%. The risk has not changed, but the return has, impacted by the ongoing decline to interest rates.
The other key takeaway is that it reinforces our belief that general interest rates appear to be lacking a catalyst to head upwards. The opposite trend appears more likely: low interest rates that may be heading lower. This week already has seen ASB Bank reduce its term deposit rates, with the other banks expected to follow.
Investors who have adopted a ‘’long and liquid’’ approach over the past 5-10 years may currently own a fixed interest portfolio averaging a yield of, say, 5%. Those who own equities too would likely have done well, and be earning north of that figure.
As these old bonds mature, reinvestment into newer bonds, priced in today’s environment, will ultimately bring a lower return than investors have enjoyed.
If this were to occur, how would investors respond? How would investors change their behaviour if interest rates from term deposits and listed bonds were to drop even further?
Four logical options exist in my mind.
The most likely would be to increase risk. If investors begin seeing interest rates around 2-3% (gross) do they instead choose to take more risk? Investing in shares and Listed Property Trusts yielding closer to 5-7% gross becomes more compelling when the alternatives are bonds and term deposits yielding close to zero real return after tax and inflation.
One could argue that we are already beginning to see this, with share prices tracking upwards over the past week, coinciding with the slide in swap rates. Share price variations are rarely due to a single cause, but low interest rate environments are usually supportive to share prices, as we have witnessed in the US. If the expectation of falling interest rates was to eventuate, the early investors benefit the most.
A second option would be to adapt to the even-lower interest rate environment by further reining in spending. This may not be possible in many instances, where people’s expenditure is beyond their control (for example, on the ever-rising, inescapable rates bills and insurance costs). Trimming bone requires a much sharper knife than simply trimming fat.
The third option is to simply consume capital over time. While rarely the preferred option, spending your savings in a controlled manner makes more sense when interest rates are falling, as the alternatives may look less palatable. The rising popularity in Reverse Mortgage (Home Equity Release) schemes indicates that this option is becoming more acceptable to New Zealanders.
The last option is to increase your income. This option is an easier one for younger investors rather than retirees, who rely on political pressure to achieve such an outcome.
An illogical option would be to increase borrowings to invest in riskier assets, hoping that their returns exceed the cost of their debt.
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The Kapiti Coast District Council’s plan to do exactly that looks to have been (wisely) shelved for the time being.
The proposal, to borrow $20 million of low-cost debt to invest primarily in shares, appears to be overstepping the boundaries of their expertise, and exposing ratepayers to additional risk. Even choosing a fund manager to apply their expertise would be a risk that few councillors are equipped to handle.
Local Government have several benefits that may have led to the creation of this idea. Their ‘’revenue’’ (more specifically, council rates) is virtually guaranteed, and their investment horizon is practically infinite, allowing them to ignore the volatility of market cycles. However, when providing what would effectively be mandatory discretionary investment management services for their ratepayers, they appeared to have both eyes on the reward, and neither on the risk.
KCDC is one of New Zealand’s most indebted councils per capita, having borrowed heavily to fund infrastructural investment. Kapiti has seen growth in residential resource consents at a far higher rate than the national average, and is witnessing strong population growth following the eventual development of improved transport links to the capital (Transmission Gully in particular).
Readers of the Council’s long-term plan will be aware of an intention to lift rates by approximately 5% each year for the next three years. The median wage has not kept pace with this level for many years, nor the level of National Superannuation.
The proposal has attracted the attention of the Deputy Controller and Auditor-General, requesting further details around the financial and legal advice they intended to seek before furthering the proposal. The proposal was abandoned shortly after the Council heard from the Auditor General’s office.
While ratepayers should be encouraged by Council initiatives seeking to better control their finances, this idea was poorly conceived. Councils rarely have in-house capital markets expertise, and would be wiser to consider options other than sharemarket speculation to improve their financial management.
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Trustpower’s bond offer is open now, and anyone wishing to participate must confirm their interest by 5pm today. We request our allocation early tomorrow.
The offer is for a 10-year unsecured, unsubordinated (senior) bond, resetting its interest rate on the fifth year. The coupon (interest rate) will be determined on Friday, but will have a minimum of 3.95% for the first five years. Investors should anticipate a rate at this level, or very close to it.
The bonds will be listed on the NZDX, allowing investors to sell the bonds at any stage at the prevailing market rate, should the need arise.
Trustpower is a Tauranga-based listed company (stock code TPW) that is in the business of providing utility services across the country.
It is New Zealand’s fifth largest electricity generator and retailer. In both categories, Meridian, Genesis, Contact and Mercury (formerly known as Mighty River Power) are larger in market share.
Trustpower also offers telecommunications services. It is the fourth largest broadband supplier in New Zealand, behind Spark and Vodafone (together almost 70% of market share) and Vocus. About half of its customers use more than one product, which has been important to its success.
In 2013, Trustpower began a new strategy of offering ‘bundles’, where people receive discounts on their services by choosing to use Trustpower for electricity, gas and telecommunications. This has the benefit of reducing ‘churn’, as people are more reluctant to change electricity providers if it results in increases to their telecommunications bill. The strategy has been successful in increasing users of all three categories.
Investors wishing to participate in the bond offer, who have not indicated their interest already, should respond immediately.
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The Reserve Bank has kept the Official Cash Rate at 1.75%.
The full statement, made on Wednesday at 2pm (previously, these statements were made at 9am on a Thursday) indicated that the rate would likely stay on hold for the entirety of this year and next, implying the next move would occur in 2021 at the earliest. This was new information to investors.
Helpfully, the Reserve Bank clarified that ‘the direction of our next OCR move could be up or down’. The New Zealand dollar responded by climbing sharply, of course. Markets were obviously expecting a more dovish tone in the statement (that is, tending towards more stimulus by reducing rates).
The Reserve Bank has highlighted that a downturn in global growth, particularly among our trading partners, remains a risk. Oil price movements over the past two months are also likely to weigh down inflation.
The potential upside that it foretells is capacity pressures forcing up prices. This is particularly pronounced in the construction sector, where demand is (and has been for years now) exceeding supply. On an obvious local scale, there are problems in finding school teachers, train drivers, fruit pickers and retirement village nurses.
The Reserve Bank does not expect employment to increase, estimating that we are close to our ‘maximum sustainable level’. This will not be welcome news to some, and does suggest that many essential services will be understaffed as our population keeps growing.
Ultimately, the Reserve Bank judged that the current rate of monetary stimulus is appropriate for at least the next two years unless conditions change.
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Shareholders of Hallensteins Glassons (HLG) will be pleased following Wednesday’s trading update for the half year.
Its expectation is for sales to increase 3.1%, and profit after tax to increase 6% from the prior year.
The share price rose 6% on the back of the news. It reports its half-year results on 29 March.
Hallensteins has long maintained impressive dividend payments and like Briscoes, seems to be coping with the changing trends in retail.
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Edward will be in Nelson on 19 February, in Napier on 25 February and in Auckland (Remuera) on 8 March.
David will be in Palmerston North and Whanganui on 18 February, Kerikeri on 4 March, and Lower Hutt on 20 March.
Chris will be in Auckland on February 25 (Albany) and 26 (Waipuna).
Kevin will be in Christchurch on Thursday 7 March.
Chris Lee & Partners Limited
Taking Stock 7 February 2019
FIRST the banks; now the insurance companies; which sector will be next?
The banks are not so much facing an upheaval at the hands of regulators - a better description would be that they have been told to prepare this year for an earthquake of biblical scale.
The easy part will be finding the multi-billion fines likely to be levied by the Australian regulators to atone for years of bad practices, poor supervision and a variable culture. The fines will be in billions.
If that were the only punishment, bank shares would not have slipped by 20-30%. Fines would not interfere with next year’s profits and dividends.
The real shake-up in New Zealand has come from the Reserve Bank’s determination to prepare banks for a once-in-200 years economic slump, requiring the banks, in effect, to halve their gearing.
That means the banks must either double their real capital - not the faux capital of repayable securities – or must greatly reduce their riskier activities, like trading in derivatives, unsecured lending, high-margin lending, financial advice or even low-deposit mortgage lending.
No one will object to the concept of making banks more resilient, or chasing them out of activities that breed a very different culture from low risk lending.
Those who have endured Taking Stock for 32 years will know that I campaigned after the 1987 crash to chase banks away from paddocks where they perceived the offerings to be lush.
For a while we had idiotic bank leadership with United Bank in Christchurch actually chasing lending share by guaranteeing to buy any house marketed by United Real Estate if the house failed to sell after six months. That particular stupidity brought about the end of the bank.
Others bought the likes of Harcourts, sharebroking firms, travel agents and insurance businesses. All went into the area of managed funds and wealth management.
No one seemed to care that the people with the right mindset to perform those tasks were an uneasy fit in a bank rule book that, figuratively speaking, sought to control at such micro levels as pencils per branch and duration of bathroom visits.
Westpac ended up selling AGC, a highly profitable finance company, to GE, BNZ integrated its profitable subsidiary BNZ Finance, National Bank abandoned Harcourts, and now we see ANZ selling Direct Broking and very probably bringing UDC Finance into the bank, having thrown away its brand value.
Banks may think that the rationalisation programmes were completed years ago but the Reserve Bank’s new proposals, set to be implemented with almost unfair haste, will bring about much more change.
One can expect much less energy spent in pursuing loans.
Dividends will fall, at least for a while, bonuses will fall, headcounts will reduce, customer expectations of matters like branches in small towns will be ignored, even KiwiSaver funds might be sold.
The old concept of deposit taking and sound lending matching the duration of deposits with loan repayment schedules might reappear.
One might wonder whether the austerity that underlies these changes is really necessary. Are we really vulnerable to a return to double figure unemployment, with subsequent real estate price collapses?
I might argue that real estate prices cannot fall dramatically while we are so short of housing, have large numbers of immigrants, and have so few tradespeople.
Are we really facing a 200-year fear when we cannot find the labour to pick fruit, man our dairy industry, plant and mill trees, cater for our aged care or teach the 40% of our 12-year olds who are said to be functionally illiterate?
It strikes me that NZ, being abundant in food and water, and free of religious wars, will not lack immigrants or tourists in the foreseeable future unless we refuse to build modern facilities like road barriers, to protect the people here.
So the Reserve Bank’s decision to hasten a protection system, in preparation for a once-in-200-year event, seems to have some other motive driving the speed of change. Does the Reserve Bank want the Australian banks to carve off their NZ subsidiaries?
Next up for reconstruction is our insurance sector, already broken, with National Mutual becoming AXA then bought by AMP, now to be sold at fire sale price as AMP recognises that there are not many dinosaurs roaming the insurance forest for a logical reason.
The British insurers abandoned us years ago, though it will be a British firm that picks up some of AMP’s scraps.
The life insurance and the savings products are the target of our regulators.
Specifically we have come to acknowledge the stupidity of incentivising salesmen to sell without regard to the legitimacy of the sale.
There have been instances of people being sold insurance that they could never collect, the buyers being ineligible for a pay-out, as might be the case for someone with a serious pre-condition buying medical insurance.
Incentives are a rotten way of promoting an honest selling culture.
Readers may recall my meeting in Malta with a few dozen salesmen from Edward Jones, the huge American group that employs 17,000 salesmen to sell its managed funds menu.
The salesmen enjoy no annual leave, other than bank holidays, unless they reach the top 200 by sales volume, at which point they and their families were shouted to 10 days of fully paid holiday in the world’s loveliest places such as Malta.
The remaining 16,800 salesmen simply have to try harder to flog off a service that presumably is of value to its clients.
Goldman Sachs incentivises its workforce by sacking each year the five per cent who are least productive, irrespective of how much these people contribute.
The insurance industry has long used paid vacations as an incentive to sell.
In the 1970s and 1980s, the life insurance salesmen were admitted to the ‘’Million Dollar Roundtable’’ when they had clients whose combined insurance reached that figure. I am guessing that the average sum insured was $20,000, meaning the salesman had 50 clients to help him gain admission to the club. Maybe it was the annual premiums that had to reach a million. That might have required 500 clients.
The insurance companies used this sort of target setting to motivate managers.
In the 1980s the insurers tried to handcuff its best salesmen to the brand, say National Mutual, by lending enormous sums, hundreds of thousands or millions, to the salesmen to help the salesmen achieve greater wealth.
Many grabbed the low cost loans and bought properties, some bought kiwifruit farms, or set up restaurants and some leveraged the crazy loans, seeking mega wealth.
Many lost the assets, could not repay, and were grateful that the insurance companies wrote off the loans, burying them in the contingency funds that were siphoned off each year, away from the owners of what were giant mutuals (co-operatives).
Today the incentives are still used, rarely declared, yet still they create the inference that salesmen will influence clients for the benefit of the salesmen.
Whatever happened to the concepts of ‘’client first’’ or to a ‘’duty of care’’ or to ‘’accountability’’?
Of course the discredited finance company sector also had its share of companies which tried to influence its sales force to skew their selling by offering personal incentives.
Hanover would offer its highest suppliers free trips to Australian sporting events, spouse included, all kitted out in Hanover-branded clothing.
Bridgecorp paid the golf subs for many advisers, persuaded golf clubs to promote the rotten Bridgecorp debentures and notes in return for sponsorship, and once offered trips to the Rugby World Cup for those who sold their unsecured notes.
There is nothing new in the concept of incentivising self-focussed salesmen to flog off products. The rotten result is that the worst products – hardest to sell – often had the richest incentives.
My view is that ‘’client first’’ and ‘’duty of care’’ are concepts that would put an end to this sort of balderdash.
New Zealand will have better capital markets when these obligations are well defined, well understood and effectively policed, with real sanctions for those who breach them.
As I will be touting in my book ‘’The Billion Dollar Bonfire’’, the sanctions ought to include redistribution of wealth, from the cheats to the victims, shorter jail sentences for those who pay the fines, and most effective of all, a banning from any position that requires ‘’fit and proper’’ people.
While bankers and insurers are now facing changes, financial advisers and sharebrokers have already been subjected to more rigid enforcement of higher standards.
Will the next up be lawyers and accountants?
Should they be ‘’fit and proper’’ people, facing automatic expulsion from their privileged positions when they behave greedily or without morality?
Auditors and trustees are now licensed, subject to Financial Market Authority examination.
After the banks and insurance companies, will the lawyers and accountants be the last categories forced to cleanse themselves of bad practices?
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THE pressure placed on bank lending by the new capital demands would logically lead to the next iteration of non-bank lending.
I doubt that the Harmoney P2P model is ever going to achieve the scale and reputation to take over as the modern form of finance company lending.
Before the deposit taking and second tier lending sector is repopulated, I hope the lessons of the 2006-2008 era are used to ensure much better laws enshrine the sector.
The book I am to publish will outline the oafish laws and practices that enabled that sector to capture billions of investor money, misuse it, lie about its standards and yet win the endorsement of directors, auditors, trustees, regulators and credit-raters.
The laws and the people involved were the problems.
The Billion Dollar Bonfire will demonstrate how the wrong people can ruin a good company, how bad law and lack of accountability enables them and how lazy and self-focussed people can feed off them, leaving it to bright, caring motivated politicians to stop a disaster.
I have around 150 books still available from our office. The publisher will order a first print of 5,000.
One hopes that the next round of finance companies does not emerge until much sharper laws and protocols are debated by those with knowledge and the power to legislate. The new laws should guarantee that the courts will be available to apply the law.
We would be doing ourselves no favour if we ignored the series of absurd errors that destroyed Allan Hubbard’s empire, transferred his wealth to undeserving others, destroyed investor and tax-payer money and left him to be scapegoated as the sole cause of the catastrophe.
The book will be published in about 12 weeks.
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HOLDERS of the ASB perpetual preference shares (ASBPA and ASBPB) will be repaid by Commonwealth Bank of Australia (CBA being the parent company of ASB) in full, on May 15 this year.
This will produce a tidy gain for our clients who in the last decade have bought many millions of these securities at deep discounts.
They bought in the hope that CBA would redeem the shares at par once the equity credit for this hybrid security was removed.
CBA has now responded sensibly, in advance of losing equity credit.
The most impressive aspect of this announcement was the absence of market anticipation, less politely described as insider trading.
Clearly CBA succeeded in shrouding the repayment plan, avoiding any fallout that would result in a sudden surge in the market price of the instrument.
In fact the reverse occurred. The price of ASBPAs and ASBPBs fell by 10% in recent weeks.
The buyers at the cheaper price have been delivered rich clover.
My expectation is that new bond issues will be timed to soak up the hundreds of millions being repaid.
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Edward will be in Nelson on 19 February, on his second visit to Napier on 25 February and in Auckland (Remuera) on 8 March.
David will be in Palmerston North and Whanganui on 18 February, Kerikeri on 4 March, Lower Hutt on 20 March.
Johnny and I will be in Christchurch on Wednesday 20 February (afternoon) and Thursday 21 February (morning).
I will be in Auckland on February 25 and 26.
Kevin will be in Christchurch on Thursday 7 March.
Chris lee & Partners Limited
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