MUTUAL BENEFITS

Dominion, Volume 29, Issue 220, 13 June 1936, Page 12

MUTUAL BENEFITS

State and the Bank of New Zealand

GOVERNMENTS SOUND INVESTMENT

The relationship of the State to the Bank of New Zealand was reviewed by Sir George Elliot, chairman of directors, in his address to shareholders at the annual meeting yesterday.

When the Bank of Neiy Zealand was in difficulties in 1894, the position was discussed with the members of the

then Government and an arrangement was entered into whereby the bank was enabled to borrow £2,000,000 on an issue of stock in London under the guarantee of the New Zealand Government both as to payment of interest and repayment of principal, he said. In 1904, on maturity of the guaranteed stock, a fresh issue was made for £1,000,000 for 10 years, the balance being repaid. In 1914 the amount was reduced to £529,988, redeemable in 20 years. This was duly repaid in 1934 and the Government guarantee extinguished. Government’s Share Holdings. The Government now held £500,000 in A preference shares, carrying a fixed preferential but noil-cumulative dividend of 10 per cent., £1,375,000 in B preference shares, and £234,375 in C long-term mortgage shares. The A and B preference shares ranked for capital before the ordinary shares, and would also participate in any surplus assets.

For these 2.109,375 shares, the Government paid £1,859,375. To-day ot. a 4 per cent, return basis they were worth, on present dividends, £4,100,000. It would be seen then that for this guarantee, against a high-class security, the Government had done exceedingly well. Furthermore, over the years, the Government had received an average of 104 per cent, per annum by way of dividends on its investment in Bank of New Zealand shares. Following the Government’s assistance to the bank a change was made in the constitution of the board. The Government, although the owner of only one-third of the capital of the bank, has the right to appoint four directors, while the private shareholders, owning two-thirds, have the right to elect only two.

"I want you to understand that I do not suggest for one moment that the Government of that day was overpaid for the service it rendered to the bank,” continued Sir George Elliot. “Although the guarantee was primarily given more for the welfare of the country than for the bank, the bank derived benefit, ■ and fo r this the Government was entitled to some compensation. I am glad it has reaped such a bountiful harvest, but I am sure that the most optimistic person sitting round the table on that fateful night in 1894 never dreamed that, as a consequence of the arrangement entered into, the country would benefit so remarkably. “From time to time New Zealand Governments have guaranteed the repayment of funds borrowed in London by" local bodies, naturally without looking for specific rewards, but never did they enter into a guarantee that did more for the financial well-being of the Dominion as a whole, nor one that has been more remunerative to the country than that entered into with the Bank of New Zealand.” Benefits Derived. The point he desired to make was that when speakers or writers were referring to the service rendered to the bank, they should not entirely ignore the benefits the Government had derived as a consequence of that service. I No one studying the successive bai-ance-sheets since 1895 could help being impressed with the remarkable progress the batik had made. Much credit was due to directors and management for steering the bank safely through those early, highly dangerous times. For some years subsequent to 1895, although increasing profits were earned annually, no dividends were paid to shareholders, all surpluses being used to write down assets and place the bank in a strong financial position. Today the shareholders were reaping the benefit of that policy. There had been a gradual reduction in the earning power of the bank. This had been brought about by a general fall of interest rates both here and in London, by a curtailment of advances, owing to lessened demand, and by increasing deposits which cannot at present be profitably employed. Moreover the amendments of the Reserve Bank Act and certain provisions of the Primary Products Marketing Act, already referred to, would have a tendency to further reduce banking profits. Mr. W. Watson, at the last annual meeting, had drawn attention to the fact that a strong financial institution must be of great value to any country. If this bank had not, over many years, built up strong reserves, it could not have carried on the business of the country so smoothly, nor would it have emerged from the depression (through which, happily, we seemed to be passing) in the strong financial position it hold to-day. It gave him great pleasure to he able to say that during the years he had been a director of the bank, to the best of his knowledge and belief, no customer had been harshly treated. On the other hand, any client finding himsalf in financial difficulties, and showing a readiness to help himself, had ever received the most sympathetic consideration.