It would also hit the profits of NZ’s biggest banks, which are owned by Commonwealth Bank, ANZ Bank, Westpac and National Australia Bank, sparking a debate about how the extra cost would be shared between customers and bank shareholders.
Mr Bascand told the Sydney Morning Herald and The Age that the RBNZ would be “very surprised” if shareholders needed to maintain exactly the same rates of return being made by the big four’s local operations in New Zealand.
In the end it will be up to the investors to decide their capital allocation and whether they will be prepared to put that much more capital into the New Zealand banks.
RBNZ deputy governor Geoff Bascand
“In the end it will be up to the investors to decide their capital allocation and whether they will be prepared to put that much more capital into the New Zealand banks,” Mr Bascand said.
“But the New Zealand banks have been highly profitable, they are disproportionately profitable relative to their parents, they earn a greater share of profits than they do of their capital weighting, or of their asset share.”
The big four Australian banks made $4.4 billion in cash profits from their New Zealand operations in 2018 representing about 15 per cent of their total combined profit with ANZ tipped to experience the most significant hit.
Mr Bascand said the central bank had estimated the big four’s NZ return on equity, until recently 14 to 15 per cent, would decline by between and 1 and 3 percentage points as a result of the change.
While some Australian analysts counter that NZ bank profitability is similar to Australia once institutional business is excluded, Deutsche Bank analysts Matthew Wilson and Anthony Ho last week supported the view that investors would need to accept lower bank returns in NZ.
The analysts said the big four enjoyed “oligopoly-like returns” from a market in which they controlled 88 per cent of assets, and the RBNZ’s proposal was “quite sensible.”
Local critics have also said the proposal is unnecessary when Australia banks have already been forced to raise billion in capital in recent years.
But Mr Bascand said “each country has to have its own capacity to resolve its own banking crisis,” and New Zealand could not rely on the Australian parent companies for a bail-out.
“You could get a banking crisis that Australia and NZ are both hit concurrently with, and we need to make sure our banks stand strong in it,” he said.
In response to the proposal, analysts have predicted the Australian banks may increase interest rates on NZ borrowers sharply, or even consider de-merging their NZ businesses.
Commonwealth Bank chief executive Matt Comyn last week told a parliamentary inquiry the RBNZ change would require a “substantial” increase in capital and there could be a “dilution” of returns.
Westpac chief executive Brian Hartzer told the same inquiry that the RBNZ’s proposal was a “very serious concern” and would lead to “interesting choices about credit appetite, cost of credit and the like.”
The RBNZ has acknowledged interest rates charged by banks will probably rise as a result of the change, but Mr Bascand said it estimated the impact would be about half a standard 0.25 percentage point move in official interest rates.
If banks’ borrowing rates did rise more sharply than expected, he said the RBNZ could offset this through monetary policy, also taking into account wider economic forces.
Clancy Yeates is a business reporter.