Should the Australian banks list their NZ subsidiaries on NZX?
The Australian expert the Reserve Bank engaged to critique its bank capital proposals has suggested that the big four banks could list on NZX as a means of dealing with the regulator's desire to force them to hold more capital.
James Cummings of Macquarie University is not the first to suggest this but he doesn't appear to have looked at how practical his suggestion is.
"A cost-effective response of the four large New Zealand banks will be to raise additional equity financing by listing their common shares in New Zealand," Cummings says in his report.
"The Australian parent banks need not relinquish their controlling stakes in the banks for the listings to occur," he says.
"This response will allow the large New Zealand banks to distribute a substantially greater amount of imputations credits to New Zealand-resident taxpayers.
"The value that investors attribute to the imputation credits for reducing their personal taxation liabilities will reduce the impact of increased equity financing on bank funding costs."
RBNZ is scheduled to announce its final decisions on bank capital in early December but it has proposed near doubling the minimum amount of equity the big four banks have to hold from 8.5 percent of risk-weighted assets to 16 percent.
RBNZ has estimated that the combined impact of that and other rule changes would mean the banks would have to raise about $20 billion in additional equity.
To put that in the context of how easily the NZ investment community could absorb such a large capital issuance, when the government sold 49 percent of Meridian Energy in October 2013, the sale was so large that payment of $1 of the $2.50 issue price, which valued Meridian at $3.14 billion, was delayed for 18 months.
Cummings gave no indication that he was aware of the history of Australian banks listing on NZX and didn't say anything about whether the local market could provide so much capital.
Nor did he reference a November 2017 RBNZ paper by Susan Guthrie on whether the central bank should require banks to list shares locally – the central bank rejected that proposition.
However, a source told BusinessDesk Cummings was aware of at least the Westpac history.
Both ASX-listed ANZ Bank and Westpac also have their parent companies' shares listed on NZX currently as "foreign exempt issuers." Both already pay some imputation credits to their New Zealand shareholders and have done so since 2013.
Westpac used to have a separate class of parent company shares listed on NZX between 1999 and 2005 so it could distribute imputation credits to its New Zealand shareholders, but a change in tax rules that would have disadvantaged Australian shareholders caused it to unwind that structure.
Once upon a time, both ANZ NZ and Bank of New Zealand shares were listed on the local stock exchange but ANZ was acquired by its parent in 1986 and BNZ by National Australia Bank in 1992.
Countrywide bank used to have an NZ listing until it was swallowed in 1992 into what became ANZ. Similarly, Westpac took over the NZ-listed Trust Bank in 1996.
Among other findings, the RBNZ paper says that "local equity and debt markets are shallow and illiquid" and it rubbished the claim often made by brokers that listed bank capital instruments have historically been important for NZX's listed debt market because "the evidence suggests otherwise."
Guthrie noted that of the $8.5 billion of debt securities that the local subsidiaries of Australian banks had issued, only $1.9 billion, or 22 percent, had been listed locally with the remainder issued to the parent companies.
"In contrast to bank submissions, it would appear that NZDX would have grown significantly without the – relatively limited – bank debt capital listing that has occurred," she said.
Guthrie estimated that requiring each bank to list shares equal to 25-49 percent of their contributed shareholder equity would create new NZX listings equal in aggregate to $4.8-9.4 billion.
Guthrie said each of the big four banks would have to list at least $1 billion of equity locally in order to be large enough to be eligible for investment by mandate-limited foreign investors.
That would mean at least 11 percent of the ANZ NZ subsidiary's equity and 42 percent of BNZ's.
Guthrie also looked at how much NZX would benefit from such listings because well-developed local markets have the potential to reduce the duration and severity of a banking crisis because those markets could provide an alternative to bank credit.
"Requiring large local banks to list equity locally seems unlikely to materially improve the depth and liquidity of the local equity market because the scale of the issuance required to effect the necessary change is too large relative to the likely magnitude of equity in the big four banks," she concluded.
However, local listings could bring corporate governance improvements, Guthrie said.
A question neither Guthrie nor Cummings addresses is what would happen to the big four banks' credit ratings, should their parents partially list them on NZX.
Currently, they benefit – as arguably New Zealand borrowers do through lower borrowing costs – from the same "AA-" credit ratings of their parents but international ratings agency Standard & Poor's rates them standalone as "BBB+."
A reasonable assumption would be that S&P would give the NZ subsidiaries a higher rating if their equity near doubled, but it isn't obvious the rating would be as high as that of their parents'.