BNZ report ‘cautious’

Press, 28 July 1987, Page 27

BNZ report ‘cautious’

By

DAVID HAY

Who would you pick for your team of New Zealand’s business all stars? A team including Ron Brierley (chairman), Mr Rob Campbell, an economic consultant and former union secretary, Mr Len Bayliss, an economist, Mr Peter Leeming, a retail chain manager and accountant, Dr Susan Lojkine, a tax expert, Mr Patrick L. Morrison, the chairman of the Wool Board, and Mr Frank Pearson, an investment expert, would not be a bad bet.

Appropriately, they are the directors of the Bank of New Zealand. But they should not be considered as New Zealand’s national business team isn’t simply just for that reason. They look a lot like a New Zealand sports team in their group photo in the BNZ annual report. It helps that the directors are all wearing black suits (except Dr Lojkine. She wears a dark grey one).

Wearing black suits is an established convention of international banking. This was confirmed, along with a lot of other conventional banking points, when comparing the report with those of two other banks. The banks concerned were Westpac Banking Corporation and National Australia Bank, Ltd, with reports for the year to September 30, 1986. We all know Westpac, and we’ll see a lot more of National Australia, which holds a majority

shareholding in Broadbank and has just got a New Zealand banking licence. How do the Australian banks compare with the Bank of New Zealand? The covers of their reports are not any glossier, and the directors’ suits certainly are not any blacker.

The BNZ report seems like a lightweight at 36 pages compared to Westpac’s 61 and National Australia’s 80.

But the figures themselves show our New Zealand bank very favourably.

The BNZ increased its profit between 1986 and 1987 from SNZIO3 million to SNZISOM. In the same September period Westpac had a decrease from sAust36BM to sAust2B2M, and National Australia’s profit declined from sAust332M to sAust292M. The BNZ’s performance was even more impressive when the bank’s relative size is considered. Its 1987 profit is a 24 per cent return on average net assets, compared with 12 per cent and 14 per cent for Westpac and National respectively. The BNZ’s chairman, Mr Brierley, is very cautious about next year’s result. He comments in the director’s report: “The progressive adjustment of the economy to deregulation will see confirmation of some of the uncertainties of the past year. For the banking industry the entry of new banks will increase competition and exert strong pressures on margins.”

The directors forecast a result of $175 million. That is only equivalent to the current year’s result adjusted for inflation and for the interest earned on the proceeds of the 1987 public share issue. Other parts of the annual accounts are also interesting to compare. For example, the statement of changes in financial position, which comes right at the end of the BNZ’s report. The N.Z. Society of Accountants is currently reviewing the requirements for these statements. It is likely that by next-year we will see a much more useful “Cash Flows Statement,” prepared under Exposure Draft No. 39, rather than the “Statement of Changes in Financial Position” under Statement of Standard Accounting Practice No. 10. The bank has complied with all the requirements of current accounting practice. It is not its fault that

the present statement is a classic illustration of the Accounting and Research Standards Board’s comments on statements of changes in general.

The board, cautious as always, says: "A number of problems have been identified with the current practice of reporting changes in financial position. The principal of these has been the lack of clear objectives for the statement.” The statement of changes in accounting position always did have its limitations. The problem here is mainly that it was never really designed for banks.

Cash flows, or changes in financial position for that matter, are mainly concerned not with reinvested profit and adjustments to it, but with people going into banks and making deposits or withdrawals.

All the movements of this kind are put together in the present statement under “increase/(decrease) in working capital.”

Increases in assets and liabilities of about $3 billion each are netted off, and the statement deals mainly with the profit and the share issue, totalling S4OOM.

The two Australian banks show a "Statement of Source and Application of Funds.” These are informative. They show for instance that Westpac had total sources of funds of nearly sAustll billion, mainly from increased

customer deposits. The statement shows that these were mainly invested in loans and liquid assets. The revised New Zealand form in Exposure Draft 39 will separate out cash flow from operating, investing, and financing activities. That means most of the BNZ’s real increase in funds and its investment in assets, sdch as deposits which increased $2.6 billion this year, will be given more prominence (as cash flow from financing activities).

This will help give a clearer idea of how the bank’s cash resources have moved in the year. We can expect to see the BNZ putting more of its resources to "widen the financing and investment choices available to our customers,” according to the group chief executive, Mr Robert McCay. Also, we can expect that "opening of new overseas offices will add to the bank’s already extensive international network.”

The report illustrates those new products —

EFT-POS terminals; export market development assistance; international funding; and “relationship banking.” The overseas expansion is called “the challenge across the Tasman.” BNZ Australia is taking on the Australian industry in a few imaginative ways. That is partly by working with New Zealand companies like Chase Cor-

poration and Equiticorp. The bank also provides imaginative customer services including a Visa card with a 0.25 per cent rebate, the "smarter cheque account” and "smarter mortgage.”

That does not necessarily mean that we will see those services in New Zealand, where the bank is in a much different market position. As Mr McCay says: “Because BNZ is the market leader, it is naturally theforemost target of new overseas and domestic banks looking for business.”

Mr McCay also says there is no room for complacency. Mr Brierley says: "We have an essentially new board of directors with fresh thoughts and ideas at a time of rapid adjustment.”

We can admire the Bank of New Zealand as a plucky outsider, taking on the Aussies on their own ground. That is one reason why sponsoring the America’s Cup yacht, KZ7, must have seemed so appropriate.

But, the bank downplays itself in its annual report to the public and the industry, preferring cautious profit forecasts, and traditional banker’s conservatism. The bank’s annual meeting will be held in Wellington tomorrow. David Hay is a manager at Price Waterhouse, Christchurch, and lecturer in auditing at Lincoln College.

Funds were Provided From Operations Net Profit after Tax and Extraordinary Items 150,413 Adjustments for items not requiring the outlay of funds — — Depreciation 23,057 — Deferred Tax 37,321 — Profits (After Tax) retained by Associates (949) — Minority Interests 5,295 215,137 Other Sources Issue of Shares 180,250 ' 395,387 Funds were Applied Dividends 30,000 Net Purchase of Fixed Assets 56,619 Increase in working capital including Exchange Adjustments 308,768 395387 Increase/(Decrease) in Working Capital Advances, Bills Discounted, Lease Receivables, etc. 2,420,634 Investments in New Zealand and Overseas Government and Local Body Securities 388,917 Balances due to other Banks (391,707) Deposits (2,607,361) Cash Deposits with Banks, Remittances and other Short Notice Moneys 583,506 Bills Payable, Provisions and other Liabilities (85,221) 308,768

Statement of changes in financial position as shown in the 1987 Bank of New Zealand annual report.