Cameron & Co Report Confirmed Bank Profitability

For immediate release 11 April 2001

CAMERON & CO REPORT CONFIRMED PROFITABILITY OF NEW BANK

The Cameron & Co report confirmed that New Zealand Post’s new bank would be profitable and would have competitive advantages through the existing Post Shop network, New Zealand ownership and new banking technologies, New Zealand Post Chief Executive Elmar Toime said today.

The New Zealand Post Board commissioned the report in October 2000 from Wellington investment bankers Cameron & Co to provide an independent review of the company’s business case for banking services.

New Zealand Post released today, under the Official Information Act, the Cameron & Co report and correspondence between the Board and Shareholding Ministers.

“The Cameron & Co report took a more conservative view than New Zealand Post of the number of customers switching to the new bank and the value of those customers. It examined five scenarios with even lower customer numbers, a different mix of customers and more aggressive competitor reaction than the 15 scenarios examined in New Zealand Post’s business case,” Mr Toime said.

“The bank was profitable in all five of the scenarios modelled by Cameron & Co. In four of the scenarios the bank reached the targeted 11.7 per cent after tax rate of return over three years. However, Cameron & Co believed that in the most likely scenario the bank would fall just short of that target.

“In making its decision to recommend the banking business case to the Government, the Board of New Zealand Post debated the risks outlined in the Cameron & Co report. The Board concluded that these were based on conservative assumptions that were unlikely to eventuate.

“Even so, New Zealand Post has since further developed its strategies so that the new bank will have the flexibility to respond to and mitigate these risks.

“In the Board’s view, the risks are manageable and the opportunity to create a business worth $400 million to $500 million over ten years is real and likely to be achieved given the gap in the New Zealand banking market, the strategic advantages New Zealand Post can bring to banking and the strength of the management team we are building.

“The Board was confident that the business case had demonstrated the advantages of the existing Post Shop network with over 500,000 customers each week, the strong New Zealand Post brand, New Zealand ownership, and simple value for money services.

“These advantages were sufficient to provide an attractive enough proposition for the 100,000 customers required over three years to reach the targeted rate of return of 11.7 per cent. The entry of the new bank will fill a gap in the market for personal banking services and is expected to trigger higher levels of customer switching than the present 174,000 customers who switch banks each year.

“The Board considered the effect that a major investment in banking could have on its current operations and felt confident that New Zealand Post had proven its ability to diversify successfully into other areas without threatening the performance of its core mail business.

“As prudent risk management, the Board also examined a sensible strategy to withdraw from banking that would recover much of the initial investment.”

ENDS

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