Broadbank says N.Z. in for tough year

Press, 6 July 1977, Page 25

Broadbank says N.Z. in for tough year

The next 12 months in New Zealand will not be easy because of the continuing poor terms of trade, and as a consequence a continuing balance-of-payments deficit and a need to severely restrain any growth in consumption expenditures, says the chairman of Broadbank Corporation, Ltd (Mr A. C. Montgomery), in the annual report. Realistically, this will mean a continuation of the tight monetary situation of the last six months for at least several months yet. Moreover, several of the trading banks will be under pressure to improve their ratio of lending to deposits, by reducing advances and bidding actively for money in the market.

It will be a time of rapid change in the money market, with abrupt rate movements both up and down, he says. Broadbank Corporation, Ltd, earned for its parent, Broadlands Dominion Group, Ltd, a net profit of $330,000 in the year to March 31.

This represents a return of 13.6 per cent on shareholders’ funds of $2.4M, and of 0.61 per cent on total assets of $53.7M. Detailing the achievements of the company, he says that Broadbank maintained its leadership in the prime commerical bills market.

There was strong development of other moneymarket activities, especially a year for 90-day money was common.

In the latest year total deposits rose from less than SIOM to more than SIBM, anu at times considerably exceeded that figure. A number of new overseas bank acceptance lines were negotiated, in support of an expanded provision of export and import finance to clients, Mr Montgomery says.

The company also advised on several take-over situations and company reconstructions during the year, and underwrote (or placed) seven debenture or share issues.

Mr Montgomery says that there was continued development of investment management services, particularly with the assumption of responsibility for the management of Superannuation Investments, Ltd, at the beginning of the year.

The achievements of the last 12 months are more pleasing when viewed against the economic and institutional background, he says.

Throughout the year, New Zealand ran a substantial deficit on current account of the balance of payments, and inflation was at unacceptably high levels. The Government endeavoured to grapple with these problems in various ways, most notably by sharply reducing the deficit before borrowing in the public accounts from an originally projected level of some SI4OOM to little more than SSOOM. This was a remarkable feat and, in conjunction with the continuing balance-of-payments deficit, it produced a marked contraction in the l

monetary base in the second half of the financial year, he says.

As a consequence, the i money market changed from being highly liquid in the first-half of the year to being unusually tight in the final three months to March 31.

To add to the challenge, the final quarter of the financial year was the first occasion on which the trading banks used the freedom granted them in March 1976 to bid aggressively for money in the market, and instances of trading banks paying in excess of 12 per cent and even 13 per cent a year for 90-day money was common.

The combined result of these factors was a very abrupt rise in the interest rates paid for short-term money, and as an example selling rates on prime 90day bills rose from 9 per cent a year at the end of December 1976 to 16 per cent at the end of March.

Broadbank has always be- : lieved that a strong and mature bill market can be of enormous benefit to the New Zealand economy, as it is to other advanced economies throughout the world. But, we have also always be- : lieved that bills should be used primarily to provide short-term funds to the very strongest companies in the country: they are not an appropriate means of providing finance to small or high-risk ventures. Because this has been long-standing policy, 82 per cent of all Broadbank’s bill outstandings at March 31, bore the names of companies which had shareholders’ funds in excess of SSM, and 63 per cent of outstandings bore the names of companies which had shareholders’ funds in excess of SIOM. These companies were spread throughout almost every major New Zealand industry, with especially heavy representation in such key industries as engineering, frozen meat, pastoral and allied activities, timber, and transport, Mr Montgomery says.