Sorting out the mess left by BNZ’s debt debacle

Press, 12 June 1989, Page 20

Sorting out the mess left by BNZ’s debt debacle

Pattrick Smellie,

, in Wellington, reports on the

uestions raised by the Govt’s rescue last week

IMAGINE the following situation. The Bank of New Zealand announces the largest loss ever made by any company in this country’s history. It admits, finally, that as much as 10 per cent of its huge lending portfolio is either bad or doubtful debt.

Its shareholders’ funds are wiped out by the $1.3 billion of bad debt provisions, and the bank urgently requires more than $4OO million even to be allowed to go on trading as a bank past the end of this month. To be taken seriously internationally, $6OO million of new capital would be more desirable.

That was one of the outcomes of the disastrous BNZ loss which faced the Minister of Finance, Mr Caygill, had he not stitched together the deal by which Capital Markets, Ltd, obtained onethird of the bank at the bargain price of $3OO million last week. Had the Capital Markets deal or another deal like it not been available, the Treasury believed there could easily have been a run on the bank by depositors. Individual and institutional shareholders, stunned by the size of the loss, could have been expected to force the share price to subterranean levels. Business confidence would have been walloped again by the sheer size of the loss, and the poor economic performance it implied. Major doubts about the Government’s ability to meet Budget targets, just six weeks out from the Budget, would have created havoc in the financial markets, with consequences for the dollar and interest fates.

Any search to find a new partner in the bank would have been severely hampered by that climate. As the head of the Treasury’s Industries Branch, Mr Richard Shallcrass, put it: “It would have been very difficult to set up a truly competitive situa-

tion.” It is likely offers of “help” from would-be partners would have made the Capital Markets deal at 70 cents a share look generous.

Instead, what happened? For a start, the focus of attention was immediately on the solution rather than the problem. By facing up once and for all to the problems which have dogged it ever since the 1987 sharemarket crash, the BNZ earned some praise. And for presenting a credible rescue plan which was in line with the Government’s Budget objectives, as well as allowing trouble-free partial privatisation, the business community was prepared to give the Government marks for consistency and, for once, good planning. Depositors probably just heard a sigh of relief. Even the Labour Party had to accept the deal. Faced with a no-win situation, the party president, Ms Ruth Dyson, endorsed the sale to Capital Markets since it protected small savers.

The BNZ’s share price quickly recovered some of the ground it lost immediately after the loss announcement, and Capital Markets shareholders reacted with glee. The company’s share price rose 27 cents from where it was before the deal was announced. As an exercise in damage control, Mr Caygill’s decision to go with the Capital Markets deal appears to have been the right one. But he has had to pay a heavy price for being forced to sell out when the bank’s affairs were at their fattiest. Capital Markets has picked up a bargain, paying

around half as much for their stake as others have bid in the last six months. That has prompted the jilted former suitor, Brierley Investments, Ltd, to complain it would have paid more for the same deal. That is all very well. But the fact is that Brierley’s never made such an offer, despite its being obvious since the National Australia Bank bid was called off three months ago that the Government would still be seeking new sources of capital to bolster the BNZ against its losses. Brierley’s was simply playing politics after losing at a game for which that company knows the rules as well as any in New Zealand.

For similar reasons, the Opposition’s attempts to make mud stick to the sale last week were poorly targeted. Hoist by their own petard on the foreign ownership question, National could do little with Mr Caygill’s extraordinary admission that he now wished N.A.B. had bought the bank. And they were on weak ground suggesting that it was Government action in the last few months which has brought the BNZ to its present low point.

They are perfectly right to criticise the stewardship of both the Government and the BNZ board. But that is blame that National has to share. Appointments to the BNZ board have traditionally been political, and there have been National-appointed members of the board throughout Labour’ term of office.

National must also acknowledge that senior management, many of whom have recently

been replaced, were mostly in place when National was in office.

There must be questions, too, about why it took existing board members such as the chairman, Mr Frank Pearson, so long to blow the whistle on the bank’s affairs. A seasoned investment analyst and commentator, why did he take till the end of last year to act on the problems caused for the bank by the sharemarket crash, and the perceived poor performance of the former chairman, Sir Ron Brierley. But a / bigger question still unanswered is whether the BNZ is out of the mire yet. Part of the answer must lie in how appropriate a new partner Capital Markets makes for the bank.

With shareholders’ funds of only $155.4 million and total assets of $204 million, Capital Markets is little more than a flea on the back of the BNZ elephant. The company is carrying almost no debt at present, so that should save it from the kind of fate which awaited the highly indebted Equiticorp when it was left holding another poor-per-forming Crown asset. New Zealand Steel, Ltd.

But week-end reports said some international observers were concerned at the risk of any problems at Capital Markets becoming the problems of the BNZ. They cited restrictions in Australia and Britain, limiting holdings in banks to no more than 15 per cent, against Capital Markets' 29.5 per cent of the BNZ.

But perhaps most interesting of all will be discovering howaccurate the huge bad debt provisions, which sparked last week’s rescue package, turn out to be. Their enormity was an instrumental factor in achieving what the Government could not previously do because of public opposition — that is, sell chunks of the BNZ.

The provisions have certainly focused attention on whether it is appropriate for Governments to run banks. On the one hand, it is the Government's ability to underwrite the bail-out which has kept the country’s biggest bank afloat on this occasion. On the other, it is arguably no accident that the only bank to get into such deep trouble is State-owned. But if the bad debt provisions have been overstated, as many in the financial markets believe, then Capital Markets will have picked up even more of a bargain than it has already. While the various parties at fault seek to blame one another for this state of affairs, it will be the taxpayer who has lost out.