WEBVTT - Is strict lending killing big ideas? ANZ Group CEO Shayne Elliot 0:00:04.280 --> 0:00:07.480 Welcome to Shared Lunch, brought to you by Chase's. I'm 0:00:07.480 --> 0:00:10.320 Brook Roberts, one of the co founders and co CEOs 0:00:10.480 --> 0:00:13.480 at shas EA's. In today's episode, I'll be speaking to 0:00:13.520 --> 0:00:15.600 one of the big bosses of one of the big 0:00:15.600 --> 0:00:19.080 four banks, A and Z Group CEO Shane Elliott will 0:00:19.120 --> 0:00:21.400 cover the banks for your results, the hot topic of 0:00:21.400 --> 0:00:25.000 competition and where the sector is headed. But before we 0:00:25.040 --> 0:00:28.680 get started, has some important information investing involves. 0:00:28.680 --> 0:00:30.800 For risk you might lose the money you start with. 0:00:31.080 --> 0:00:34.840 We recommend talking to a licensed financial advisor. We also 0:00:34.880 --> 0:00:38.839 recommend reading product disclosure documents before deciding to invest. Everything 0:00:38.880 --> 0:00:40.920 you're about to see and here is current at the 0:00:40.920 --> 0:00:41.640 time of recording. 0:00:41.680 --> 0:00:45.240 Hey Shane, let's start with some of your backgrounds. You're 0:00:45.280 --> 0:00:47.680 a key we now in charge of one of the 0:00:47.800 --> 0:00:50.160 largest banks in Australasia. 0:00:50.320 --> 0:00:52.479 Has banking always been part of your DNA? 0:00:52.680 --> 0:00:53.880 Oh? By accident? 0:00:54.080 --> 0:00:54.360 Has? 0:00:54.440 --> 0:00:56.640 I mean? Wasn't necessarily a plant when I let school 0:00:56.680 --> 0:01:00.240 in the UNI. But after university I I literally fell 0:01:00.280 --> 0:01:04.720 into banking by accident. I responded to a advert in 0:01:04.760 --> 0:01:07.520 a newspaper to work at City Banker as a trainee, 0:01:07.560 --> 0:01:10.680 and so I've always liked sort of numbers and finance 0:01:10.720 --> 0:01:13.480 and things. But yes, and ever since then I've sort 0:01:13.480 --> 0:01:14.280 of stuck it out. 0:01:14.400 --> 0:01:16.679 And now you're the CEO of A and Z group 0:01:17.120 --> 0:01:20.120 that spans across Australia and our teiro. 0:01:20.800 --> 0:01:23.440 How different does A and Z operate in those two markets? 0:01:23.800 --> 0:01:26.000 Well, actually all we operate in twenty nine markets, so 0:01:26.120 --> 0:01:29.760 just to be kid, so all around the world, and 0:01:29.800 --> 0:01:31.760 we've done so for a long time actually, I mean, 0:01:31.800 --> 0:01:33.200 and just to give you a sense of history, we're 0:01:33.240 --> 0:01:35.440 almost two hundred years old. We started here in Australia 0:01:35.480 --> 0:01:39.200 in eighteen twenty eight, in New Zealand and eighteen forty, 0:01:39.959 --> 0:01:42.720 Fiji in eighteen eighty, Papua New Guinea in eighteen ten, 0:01:42.840 --> 0:01:46.400 and then right and now we operate right across Asia Pacific, 0:01:47.000 --> 0:01:49.680 including all the big money centers you know, Tokyo, New York, 0:01:49.760 --> 0:01:53.920 Do Bai, London, Hong Kong, et cetera, and right across 0:01:53.920 --> 0:01:56.920 the Pacific islands, so twenty nine countries. But you know, 0:01:57.080 --> 0:02:00.600 our home sort of, I guess it's what it says 0:02:00.600 --> 0:02:03.480 on the ten right A Z. That's our home, Australia 0:02:03.480 --> 0:02:05.280 and New Zealand. We've been here a long time. We're 0:02:05.320 --> 0:02:09.080 big in both places. What's different lots and then not 0:02:09.200 --> 0:02:10.440 very much. I mean, at the end of the day, 0:02:10.440 --> 0:02:12.920 people want the same basic things, right and certainly from 0:02:12.919 --> 0:02:16.680 an AMZ strategy point of view, people want help saving 0:02:16.760 --> 0:02:20.280 for finding, buying and owning a house, or starting running 0:02:20.320 --> 0:02:23.240 and growing a small business, or at the beginning of 0:02:23.280 --> 0:02:25.799 TOUN if you're a really large company, you want help 0:02:25.880 --> 0:02:29.840 connecting with the rest of the world and moving goods, 0:02:30.680 --> 0:02:33.400 whether that's scairy products, iron or whatever it might be, 0:02:34.000 --> 0:02:36.440 and money around the world. And those are the three 0:02:36.480 --> 0:02:38.120 things we do, and that's what we help people on 0:02:38.160 --> 0:02:40.600 both sides of the Tasman do. So not really a 0:02:40.639 --> 0:02:45.920 lot of differences. They're obviously regulations different, consumer preferences can 0:02:45.919 --> 0:02:48.880 be a little bit different, competitions different, but you know, 0:02:49.040 --> 0:02:51.520 at the fundamental you'd say there's a lot of similarities. 0:02:51.880 --> 0:02:54.079 First off, let's not ignore the A and Z four 0:02:54.120 --> 0:02:56.959 year results. So revenue was similar to last year, down 0:02:57.000 --> 0:03:00.280 two percent to twenty point five to five billion, is 0:03:00.320 --> 0:03:02.800 that four percent to ten point five to five billion, 0:03:03.320 --> 0:03:05.880 and cash profit down around nine point three percent to 0:03:06.120 --> 0:03:09.480 six point seven three billion. There's a ton of change 0:03:09.520 --> 0:03:13.480 happening across banking with open banking and more neo banks 0:03:13.480 --> 0:03:15.799 popping up. How is A and Z placed to keep 0:03:15.840 --> 0:03:17.800 its position and prosper. 0:03:18.080 --> 0:03:20.840 Yes, So when I started done nine years ago as CEO, 0:03:20.960 --> 0:03:23.680 we basically did a lot of sort of soul searching 0:03:23.760 --> 0:03:26.520 about what the environment we felt was going to be 0:03:26.680 --> 0:03:29.840 like and how would you thrive as a large, comprehensive, 0:03:29.840 --> 0:03:32.080 pretty diverse, wide organization like A and Z do you know, 0:03:32.080 --> 0:03:34.200 with ten billion customers across twenty un markets. And what 0:03:34.200 --> 0:03:35.880 we said what we found is and it's not I 0:03:35.880 --> 0:03:38.040 don't think this is rocket science. We said, the world 0:03:38.080 --> 0:03:41.720 we live in, consumers want more, and consumers want more, 0:03:41.720 --> 0:03:43.000 and they don't want to pay for it, right, and 0:03:43.040 --> 0:03:46.160 they're being trained, which is a good thing to want. 0:03:46.200 --> 0:03:50.680 Twenty four x seven amazing services always getting better, largely 0:03:50.720 --> 0:03:54.320 for free. You know, So consumers want more, the community 0:03:54.360 --> 0:03:56.880 wants more. The community expects us to behave differently, you know, 0:03:56.920 --> 0:04:00.000 it's not good enough community expectation to say, well, though 0:04:00.000 --> 0:04:02.440 things are legal, therefore I do it. And so people 0:04:02.440 --> 0:04:04.560 have higher standards at a community about how we behave. 0:04:04.840 --> 0:04:07.000 You know, regulators want more, whether it's about more capital, 0:04:07.080 --> 0:04:11.040 more liquidity, better behavior, all of those things. And then Lastly, 0:04:11.120 --> 0:04:12.920 competition was going to be more intense. I mean, we 0:04:13.760 --> 0:04:16.520 live in a world that is protected to some degree. 0:04:16.520 --> 0:04:18.520 We have a moat you can use in that sort 0:04:18.560 --> 0:04:21.840 of language for good reasons, because you know, we as 0:04:21.880 --> 0:04:24.200 a community who don't want just anybody running a bank, 0:04:24.240 --> 0:04:27.440 because these banks are looking after our deposits and we 0:04:27.440 --> 0:04:29.760 don't want it to fail. So there were reasonably high 0:04:29.839 --> 0:04:32.240 barriers to intrigue yet to be bed, yet to have 0:04:32.279 --> 0:04:34.239 a lot of capital, you had to be well run. 0:04:34.680 --> 0:04:36.440 Some of those barriers have actually come down a little 0:04:36.440 --> 0:04:39.760 bit for good reasons, to encourage more you mentioned neo banks, 0:04:39.800 --> 0:04:43.400 but probably more importantly more people doing payments and people 0:04:43.400 --> 0:04:46.200 like revolution Wiser and or you know, buying our pay 0:04:46.240 --> 0:04:48.919 later and all these sorts of things. So way more competition. 0:04:49.240 --> 0:04:53.600 What do we do well, We said, well, we need 0:04:53.640 --> 0:04:56.680 to be more nimble. We as a big organization have 0:04:56.880 --> 0:05:01.120 historically run ourselves on big FIS systems. You know, we 0:05:01.160 --> 0:05:04.719 invest billions of dollars in big, big computer systems, big 0:05:04.760 --> 0:05:07.880 branch networks, big things. But they're fixed and they're really 0:05:07.880 --> 0:05:10.479 really efficient, but really hard to change. And so when 0:05:11.040 --> 0:05:13.800 competition comes out with something new, or regulated wants something new, 0:05:14.160 --> 0:05:18.159 both things were really difficult to change and we were slow. 0:05:18.839 --> 0:05:21.280 So we said, if we want to stay relevant, we 0:05:21.320 --> 0:05:23.800 need to be nimble, and so we set about basically 0:05:24.040 --> 0:05:28.240 changing the way we operate to be more agile and nimble. 0:05:28.560 --> 0:05:31.159 And that really comes down to two and a half things. 0:05:31.240 --> 0:05:34.160 One thing is people. We need people who have a 0:05:34.200 --> 0:05:37.640 growth mindset, people who think differently, people who are excited 0:05:37.640 --> 0:05:40.000 about change. People are courageous, people who know how to 0:05:40.440 --> 0:05:42.039 see something out in the market and say, hey, I 0:05:42.080 --> 0:05:43.400 know what that means. You are our business. So we 0:05:43.440 --> 0:05:46.200 call that growth mindset. And then we need our systems 0:05:46.240 --> 0:05:49.880 and processes that enable us to embed that change quickly, 0:05:49.960 --> 0:05:53.360 make that change, get that feature to market quickly, you know, 0:05:53.920 --> 0:05:56.960 make that change from a regulation fast in the residnient, 0:05:57.040 --> 0:06:00.240 low cost way. And the half bit was we need 0:06:00.279 --> 0:06:01.880 our people to be able to talk to our systems 0:06:01.880 --> 0:06:03.880 really well. So that was really when we looked at 0:06:03.920 --> 0:06:05.680 what we had and where we started, we said, wow, 0:06:06.080 --> 0:06:08.160 you wouldn't want to be starting from here. So we've 0:06:08.160 --> 0:06:11.520 actually actually replatform our bank and we're now on this 0:06:11.720 --> 0:06:14.640 two platform business where we say we've got these two platforms, 0:06:14.640 --> 0:06:16.960 one for retail and small businesses and one for institutional 0:06:17.080 --> 0:06:19.960 big end of customers, and we're building a whole new 0:06:20.000 --> 0:06:23.800 banking system that is fast, reliable, safe, and really really 0:06:23.839 --> 0:06:27.520 low cost. But from your from a shareholder's point of view, 0:06:27.800 --> 0:06:30.559 probably the two really important ones there. Yes, low cost. 0:06:30.640 --> 0:06:34.040 It has to be low cost. We're in a commoditized 0:06:34.080 --> 0:06:36.600 industry and the systems we have that we can talk 0:06:36.600 --> 0:06:39.120 about it later are dramatically lower cost than where we 0:06:39.160 --> 0:06:41.919 are today. But I think probably the most valuable point 0:06:41.960 --> 0:06:44.839 in terms of competitive differentiation is needs to be fast. 0:06:44.880 --> 0:06:46.520 We need to be able to launch new features and 0:06:46.560 --> 0:06:50.039 functions quickly to stay ahead and satisfy customer needs. 0:06:50.400 --> 0:06:52.719 I remember last time you're on Sheed Lunch, we talked 0:06:52.760 --> 0:06:56.960 a bit about sun Court and acquisition there. That's one 0:06:56.960 --> 0:07:00.040 of the biggest bank acquisitions in a decade and we 0:07:00.120 --> 0:07:03.080 just finalized in June after the Australian regulated the Triple 0:07:03.120 --> 0:07:08.000 acc RAN the ruler over the deal. Can we just 0:07:08.040 --> 0:07:10.720 remind listeners what the advantages this brings and also how 0:07:10.760 --> 0:07:16.240 you've addressed acc concerns about ACCC concerns about competition and 0:07:16.320 --> 0:07:21.520 the national home loan markets, smaller medium sized business banking 0:07:21.680 --> 0:07:23.960 and agricultural banking services in Queensland. 0:07:24.200 --> 0:07:26.560 It's some day that our business is heavily commoditized. Right, 0:07:26.560 --> 0:07:28.920 Our homelands do exactly the same as wespas, our credit 0:07:28.920 --> 0:07:31.040 card does the same as ASP's. You know, I mean 0:07:31.320 --> 0:07:33.520 we're living a commoditized world. That's a good thing from 0:07:33.560 --> 0:07:35.520 a consumer point of view. It means, you know, pretty 0:07:35.560 --> 0:07:37.920 new consumers get pretty good value. It's really really hard 0:07:37.920 --> 0:07:39.960 to compete in that world. And in fact, going back 0:07:39.960 --> 0:07:41.400 to what I just see it as a lot, we 0:07:41.480 --> 0:07:45.600 are very, very dependent on technology. You know, almost everything 0:07:45.600 --> 0:07:48.960 we do today, not quite, but everything is digitized. It's 0:07:49.080 --> 0:07:55.080 real time. You know, at peak on any day, per second, 0:07:55.480 --> 0:07:58.160 we have two hundred customers checking their balance every second 0:07:58.200 --> 0:08:01.320 and making three hundred payments. When you need massive scale 0:08:01.360 --> 0:08:03.920 and technology and all of that doing done digitally, you 0:08:04.000 --> 0:08:06.720 need huge scales to be able to operate that kind 0:08:06.720 --> 0:08:10.200 of machine and that monster rate. But once you build 0:08:10.240 --> 0:08:13.440 that machine, if it's two hundred customers looking every secondiar 0:08:13.440 --> 0:08:16.360 and balance, or it's three hundred, it doesn't really cost anymore, 0:08:17.320 --> 0:08:19.560 or the marginal cost of that scale is much lower. 0:08:19.680 --> 0:08:23.560 So once you've got that agility and that scale, you 0:08:23.640 --> 0:08:25.320 want to be as big as you can because you 0:08:25.360 --> 0:08:28.280 can defray the cost over more customers. And it also 0:08:28.320 --> 0:08:29.760 means that the next time we want to launch a 0:08:29.760 --> 0:08:32.680 new feature and new functions, something really cool that customers want, 0:08:33.200 --> 0:08:36.120 it's cheaper if I can spread that cost over seven 0:08:36.160 --> 0:08:39.079 million customers rather than six million. So what does Sutain 0:08:39.120 --> 0:08:41.880 Corp gave us? Gathers and more customers. It's a court 0:08:41.920 --> 0:08:43.679 band for those who know it. It's got about two 0:08:43.679 --> 0:08:46.320 and a half percent market share in Australia, we're about 0:08:46.360 --> 0:08:50.000 thirteen and a half percent share. Because of scale, so 0:08:50.000 --> 0:08:52.600 we bring one point two million customers onto our systems, 0:08:52.840 --> 0:08:56.080 it just demands that we will get significant economies of 0:08:56.080 --> 0:08:58.800 scale by having them on our platform. And from their 0:08:58.840 --> 0:09:01.840 point of view, we you know, without being arrogant, we 0:09:01.880 --> 0:09:04.880 have better systems in technology than some called bank because 0:09:04.920 --> 0:09:07.760 we're bigger and therefore we're able to bring the power 0:09:07.760 --> 0:09:11.560 of those systems and features and functionality to their one 0:09:11.559 --> 0:09:14.640 point two million customers. That's kind of it a triple C. 0:09:14.840 --> 0:09:18.000 So that's the anti competitive sort of regulator and make 0:09:18.000 --> 0:09:19.840 sure we're not doing any you know, we're not building 0:09:19.840 --> 0:09:22.920 monopolies and oligopolies and all that sort of stuff. Look, 0:09:22.920 --> 0:09:25.080 actually what we see to them as well. First of all, 0:09:25.280 --> 0:09:27.880 we're actually relatively modest today. We're thirteen and a half 0:09:27.920 --> 0:09:31.080 percent market share our biggest competitor in Australia. And again 0:09:31.120 --> 0:09:33.720 remember Sun called Bank's only in Australia and our biggest 0:09:33.720 --> 0:09:38.160 competitor here in Australia are CBA. They're twice our size twice, 0:09:39.040 --> 0:09:41.520 so they're at twenty six percent. Sure, I'm at thirteen 0:09:41.880 --> 0:09:44.160 and after doing some callp I go from thirteen to fifteen. 0:09:44.640 --> 0:09:49.720 That is hardly reshaping the competitive landscape of banking in Australia. 0:09:50.120 --> 0:09:52.800 Oh and Westpac is you know, two thirds bigger than me. 0:09:53.760 --> 0:09:55.680 So we were able to show that even with this 0:09:55.840 --> 0:09:58.560 we get bigger and get the benefits of scale, but 0:09:58.600 --> 0:10:02.760 it doesn't really change the needle, even in Queensland where 0:10:02.760 --> 0:10:05.360 Sun Corp is a little bit more, a little bit 0:10:05.360 --> 0:10:08.440 bigger and share. Even in Queensland, it didn't really shift 0:10:08.520 --> 0:10:12.120 the needle on competition. And they're able to look at 0:10:12.160 --> 0:10:14.600 what they look at the public interest and say, hey, 0:10:15.000 --> 0:10:16.880 is there a broader public interest? So we made the 0:10:17.000 --> 0:10:21.280 argument that having a bigger competitors, funny enough, is actually 0:10:21.320 --> 0:10:23.760 good for competition. You know that we're going to be 0:10:23.880 --> 0:10:26.560 more competitive with fifteen percent share because we'll be able 0:10:26.559 --> 0:10:29.560 to do more tech spending and bring more benefits to 0:10:29.600 --> 0:10:31.760 customers than we are with thirteen. And you know, at 0:10:31.800 --> 0:10:34.200 the end of the day, while it was a long process, 0:10:34.800 --> 0:10:35.280 we got that. 0:10:36.160 --> 0:10:39.000 Earlier this year in New Zealand, the Commerce Commissioner Report 0:10:39.040 --> 0:10:42.120 into personal banking was released, citing that the big four banks, 0:10:42.200 --> 0:10:45.080 including A and Z, have a stronghold on the industry 0:10:45.120 --> 0:10:49.160 with little strategic differentiation and growth targets focused on maintaining 0:10:49.240 --> 0:10:53.480 market share and protecting margins and profitability. Also recently, an 0:10:53.600 --> 0:10:56.280 zed to New Zealand CEO and Tonia defended the company's 0:10:56.280 --> 0:10:59.040 profitability in New Zealand, what do you believe are fair 0:10:59.080 --> 0:11:02.079 profits for banks to make and how do you strike 0:11:02.120 --> 0:11:05.920 the right balance between delivering for customers and shareholders and 0:11:05.920 --> 0:11:06.920 wider stakeholders. 0:11:07.200 --> 0:11:11.040 Sure so, probably unsurprisingly I disagree with that assertion that 0:11:11.080 --> 0:11:13.160 it's not competitive. I mean, you know, I've weeked here 0:11:13.240 --> 0:11:15.199 for fifteen years. I'm on the board in New Zealand. 0:11:15.600 --> 0:11:17.400 I know that Antonia and the team, just like we 0:11:17.440 --> 0:11:20.360 do up here, we wake up every morning paranoid. We 0:11:20.400 --> 0:11:22.559 wake up paranoid about somebody's going to come and try 0:11:22.559 --> 0:11:24.800 and steal our business, kind of take our customers. Somebody 0:11:24.880 --> 0:11:27.000 might have a better mouse trap out there, and we 0:11:27.080 --> 0:11:30.280 have to be on our front foot investing heavily to 0:11:30.520 --> 0:11:32.800 delight and retain customers, and that's what we do. So 0:11:33.080 --> 0:11:36.600 Sinny doesn't feel like that from the inside, that assertion 0:11:36.679 --> 0:11:40.720 that people make from the outside, Hey, what's fair. I 0:11:40.760 --> 0:11:45.560 obviously agree with Antonia's ar tatilation of the issue New 0:11:45.640 --> 0:11:48.600 Zealand in particular about Australia too. We rely on foreign capital. 0:11:50.040 --> 0:11:52.640 There are no home loans or small business loans in 0:11:52.720 --> 0:11:56.440 New Zealand. Without foreign capital investing in New Zealand, we 0:11:56.480 --> 0:11:59.320 don't pay our way. That is just the reality. Now, 0:11:59.320 --> 0:12:03.080 that's okay, because we're still a developing country in many ways, 0:12:03.200 --> 0:12:05.960 we have a massive appetite for capital to invest and 0:12:06.000 --> 0:12:09.840 grow and build a better future for ourselves and future generations. 0:12:09.920 --> 0:12:12.240 It's not necessarily a bad thing, but we need to 0:12:12.440 --> 0:12:15.120 in order to attract that capital, we need to generate 0:12:15.160 --> 0:12:17.920 a fair return. What's a fair return? Well, there's sort 0:12:17.920 --> 0:12:20.520 of techy answer to that is cost of capital. There's 0:12:20.520 --> 0:12:23.600 two costs when you're when you're a business, there's the 0:12:23.600 --> 0:12:26.360 cost of operations, and we're clearly we cover that you 0:12:26.400 --> 0:12:28.600 mentioned before. We make about twenty one billion in revenue. 0:12:28.679 --> 0:12:30.320 Is at the group twenty one billion in revenue. We 0:12:30.360 --> 0:12:32.480 spend about ten and a half eleven running the place, 0:12:32.520 --> 0:12:35.960 so clearly there's a profit there, and then we some 0:12:36.040 --> 0:12:39.199 of that's to cover credit costs. So that's the tick 0:12:39.520 --> 0:12:41.240 we do that. The second one though, is we need 0:12:41.280 --> 0:12:44.120 to cover the cost of capital. We've got seventy billion 0:12:44.160 --> 0:12:46.800 dollars of shareholders capital. That capital comes from all over 0:12:46.800 --> 0:12:49.920 the world, About almost thirty percent of it comes from 0:12:49.920 --> 0:12:52.680 outside Australia and New Zealand, and the rest comes here. 0:12:53.320 --> 0:12:56.600 People give us their capital because they expect a fair 0:12:56.640 --> 0:12:59.080 return on it, not just the dividends, but they want 0:12:59.120 --> 0:13:01.679 to see the share price grow as well. And as 0:13:01.720 --> 0:13:04.440 a rule of thumb, and there's a complex way of 0:13:04.440 --> 0:13:07.280 figuring this out, cost of capital for somebody like us 0:13:07.320 --> 0:13:11.640 said is about ten percent. So basically says, hey, if 0:13:11.679 --> 0:13:14.600 we want to continue to be able to attract capital, 0:13:14.760 --> 0:13:18.120 without which we don't survive, we need to be able 0:13:18.120 --> 0:13:20.719 to generate a return of about ten percent return on 0:13:20.800 --> 0:13:24.040 that equity to keep that money and shareholders happy and 0:13:24.120 --> 0:13:27.080 keep the investments coming so that we can continue to 0:13:27.160 --> 0:13:29.160 lend them home loans and small businesses and do all 0:13:29.160 --> 0:13:32.400 the things we do. And guess what that's kind of 0:13:32.400 --> 0:13:34.880 where we are. In fact, at a group level, our 0:13:35.000 --> 0:13:37.280 ROI lust the result we just have was only nine 0:13:37.320 --> 0:13:39.240 point seven, so we're not even quite there, and New 0:13:39.320 --> 0:13:41.960 Zealand's about the same little bit higher. So that seems 0:13:41.960 --> 0:13:46.480 about fair and reasonable if we want, if we want 0:13:47.160 --> 0:13:52.000 a well developed banking system that's safe and continuing to 0:13:52.040 --> 0:13:54.200 invest in the future. Now, if you don't get that 0:13:54.240 --> 0:13:56.160 cost to capital, and by the way, it's not a theory. 0:13:56.200 --> 0:13:57.920 You can go and have a look in Europe where 0:13:57.920 --> 0:13:59.920 they don't generate cost to capital, what do you end up? 0:14:00.040 --> 0:14:02.800 You end up with banks going backwards in terms of 0:14:02.840 --> 0:14:06.040 actually not being able to support growth and not being 0:14:06.040 --> 0:14:08.160 able to invest in the future. And that's a really 0:14:08.160 --> 0:14:10.400 really bad As they say, there's only one thing worse 0:14:10.440 --> 0:14:13.080 than a profitable bank, and that's an unprofitable bank. Yeah, 0:14:13.120 --> 0:14:15.880 because then the whole economy ends up. You really end 0:14:15.960 --> 0:14:18.800 up in diastrates. And so I think it's about balancing 0:14:18.840 --> 0:14:20.040 pretty much where it is today. 0:14:21.480 --> 0:14:25.000 Could you give a bit more insight in terms of 0:14:25.480 --> 0:14:28.000 the cost of capital here for banks in Australia, New 0:14:28.040 --> 0:14:32.840 Zealand compared to globally and maybe dive into that European 0:14:32.880 --> 0:14:33.760 example a bit more. 0:14:34.720 --> 0:14:37.720 The way you calculate it, you say, well, what would 0:14:37.720 --> 0:14:40.280 a shareholder in or if a shareholder was going to 0:14:40.920 --> 0:14:43.960 give A and Z capital, what would they expect or 0:14:44.000 --> 0:14:45.920 any bank or anybody for that matter, what would they 0:14:45.960 --> 0:14:47.840 expect in return? Whether they said, well, if you're a 0:14:47.840 --> 0:14:50.840 New Zealand investment, the lowest risk thing you can do 0:14:50.920 --> 0:14:53.720 with your money is by government bombs because the government 0:14:53.760 --> 0:14:55.960 can always print enough money to pay you back. So 0:14:56.000 --> 0:14:58.480 it said, okay, if I was going to put my money, 0:14:58.560 --> 0:15:00.720 I remember capital is a long term so what's the 0:15:00.760 --> 0:15:03.280 current Say take the five or ten year bond rate 0:15:03.360 --> 0:15:05.240 in New Zealand and say I can do that all 0:15:05.280 --> 0:15:08.680 day long. So in order to encourage me to invest 0:15:08.720 --> 0:15:12.160 in somebody else, whoever that might be, I want more 0:15:12.200 --> 0:15:15.960 than that. Otherwise it'd be stupid. Why would I accept 0:15:16.000 --> 0:15:18.760 lower to invest in something that's inherently risky and banks 0:15:18.800 --> 0:15:23.520 a risky. Let's not forget banks are leveraged seventeen times now. 0:15:23.520 --> 0:15:26.360 I mean most of the corporates that your shareholders, that 0:15:26.440 --> 0:15:28.600 your people who are buying shares might think, you know, 0:15:28.640 --> 0:15:31.160 companies are leveraged two to one, banks are seventeen to 0:15:31.240 --> 0:15:34.080 one times leveraged. Right, they're risky, so you go, oh, 0:15:34.160 --> 0:15:36.960 I want more than that. So that's your starting point, 0:15:37.240 --> 0:15:39.160 and then what you do is you basically there's a 0:15:39.200 --> 0:15:42.840 way of figuring out over long term, what's the premium 0:15:43.280 --> 0:15:48.520 historically the market has expected for that risk and basically 0:15:48.560 --> 0:15:52.520 what it's you know, again, roughly the market is expected 0:15:52.640 --> 0:15:54.600 in order to invest in a bank like anz and 0:15:54.640 --> 0:15:58.200 not just an zid WESPAC or whoever, about a five 0:15:58.520 --> 0:16:01.720 percent premium on top of that risk free rate. So 0:16:01.760 --> 0:16:03.720 that's kind of the cost of capital. Now, if you're 0:16:03.760 --> 0:16:08.480 in Europe, interest rates are lower because their bond rates 0:16:08.480 --> 0:16:10.560 are lower for a whole bunch of different reasons we 0:16:10.560 --> 0:16:13.240 can talk about if you're interested, but the risk premiums 0:16:13.960 --> 0:16:16.880 are also about. They're actually not that vastly different, so 0:16:16.920 --> 0:16:20.400 their cost of capital is a little bit lower than now's. 0:16:20.440 --> 0:16:23.320 And if you're in Japan then your cost cabalis are 0:16:23.400 --> 0:16:25.720 much lighter because they're bond rates of close to zero. 0:16:26.400 --> 0:16:29.640 So it's really just about the investor's preference on how 0:16:29.640 --> 0:16:31.720 they evaluate the risk of investing in a band con 0:16:31.760 --> 0:16:34.120 saying what's a fair return that I would given the 0:16:34.200 --> 0:16:38.120 risk associated with investing in any company? I want more 0:16:38.120 --> 0:16:40.320 than risk free rate? And as I say, long, long, long, 0:16:40.320 --> 0:16:43.280 long term says that number generally is about five ish 0:16:43.280 --> 0:16:44.880 sixtish percent over the long term. 0:16:45.560 --> 0:16:49.280 You mentioned at a conference earlier this year around how 0:16:49.320 --> 0:16:53.040 in Australia we don't bank the middle anymore. Could you 0:16:53.040 --> 0:16:55.520 elaborate on what that meant and does that ring true 0:16:55.520 --> 0:16:56.680 in New Zealand also. 0:16:56.760 --> 0:16:59.680 In a long time ago, and again I'm exaggerating to 0:16:59.680 --> 0:17:02.200 make it, but just you know, a long time ago 0:17:02.280 --> 0:17:05.440 to many of your many of your listeners here or viewers, 0:17:06.280 --> 0:17:07.639 you know, if you wanted a homeowner, you want to 0:17:07.640 --> 0:17:09.480 start a business, you'd put on your best suit or 0:17:09.520 --> 0:17:11.840 your best outfit. You go down to the bank, You 0:17:11.880 --> 0:17:13.760 meet the bank manager, you talk to them about what 0:17:13.800 --> 0:17:15.440 you wanted to do, and they would probably look you 0:17:15.520 --> 0:17:17.119 up and down, ask you a few questions, and they 0:17:17.240 --> 0:17:21.120 judge you on character and all sorts of things, including 0:17:21.160 --> 0:17:26.000 the numbers, and they'd make an assessment right, and they'd 0:17:26.040 --> 0:17:28.520 back people with initiative and good ideas and those sorts 0:17:28.520 --> 0:17:31.600 of things who wanted to have a go today for 0:17:31.600 --> 0:17:34.280 a whole bunch of good reasons. The systems moved on 0:17:34.400 --> 0:17:36.879 and regulation has said, well, we don't like that. We 0:17:36.920 --> 0:17:39.199 want we want you to be safer in your choices. 0:17:39.200 --> 0:17:41.640 We want you to have more robust analysis to back 0:17:41.680 --> 0:17:46.600 up any decision that you make. Spreadsheets, credit ratings, track records, 0:17:46.640 --> 0:17:48.840 all of those things. That's great, that's fine, and those 0:17:48.840 --> 0:17:52.600 are sensible things. Over time, those are becoming more and 0:17:52.600 --> 0:17:56.359 more and more complicated, trying to protect so well intended, 0:17:56.960 --> 0:17:59.399 trying to ensure that no nothing ever goes wrong, so 0:17:59.440 --> 0:18:02.040 nobody ever get We don't like it when people lose 0:18:02.080 --> 0:18:04.520 their house or when their business fails. So the way 0:18:04.520 --> 0:18:07.120 to do that is make it as hard as possible 0:18:07.119 --> 0:18:09.240 to get the loan in the first place. I'm not 0:18:09.240 --> 0:18:11.760 saying that that was the design principle, but that's what's happened, 0:18:11.800 --> 0:18:15.240 and so now we have to go through a lot 0:18:15.280 --> 0:18:18.399 of process, which is all good, but what it means 0:18:18.520 --> 0:18:20.240 is the people that would have had a chance in 0:18:20.280 --> 0:18:22.600 the past and missing out. And so we can see 0:18:22.600 --> 0:18:25.480 the data. It's not just me theorizing here. If you 0:18:25.480 --> 0:18:28.399 look at people who have a home loan today, you know, 0:18:29.080 --> 0:18:32.159 and you look at their level of income, relative to 0:18:32.200 --> 0:18:35.479 the average person in Australia and New Zealand. It wouldn't 0:18:35.520 --> 0:18:37.720 be surprising that over time they've always been a little 0:18:37.720 --> 0:18:39.960 bit wealthier, they've always had higher incomes in the average. 0:18:40.000 --> 0:18:43.920 That kind of makes sense. That gap, though, how much 0:18:43.960 --> 0:18:47.440 higher than the average has exploded over the last ten 0:18:47.520 --> 0:18:51.040 or fifteen years. Yeah, so now to have a home 0:18:51.119 --> 0:18:53.879 loan you need not just five ten percent more than 0:18:53.920 --> 0:18:55.919 the average, you know, and I don't know the numbers 0:18:55.920 --> 0:18:57.960 in New Zealand, but they're rough. You know, in Australia 0:18:58.000 --> 0:19:00.520 it's like forty percent higher than the average used to 0:19:00.520 --> 0:19:06.760 be ten Now it's forty Why, Well, because we build 0:19:06.800 --> 0:19:09.640 all these safety factors in now. Some people say, oh, 0:19:09.640 --> 0:19:13.360 that's because house prices are really high. Yeah, perhaps there's 0:19:13.359 --> 0:19:16.040 an element of that in there. But the real issue 0:19:16.200 --> 0:19:18.600 is that banks it's been harder and harder. I'm not 0:19:18.640 --> 0:19:20.680 the only one saying it. My peers have since it's 0:19:20.680 --> 0:19:22.320 harder to get a credit card in Australian and he's 0:19:22.359 --> 0:19:24.920 on today than it has been in thirty years. In fact, 0:19:24.960 --> 0:19:27.600 that getting a credit card is harder and Australian is 0:19:27.600 --> 0:19:31.120 in than almost anywhere else in the world because as 0:19:31.119 --> 0:19:33.800 a community we've decided we're voting for safety, and so 0:19:33.880 --> 0:19:36.080 we don't like you know, and that's fine. It just 0:19:36.119 --> 0:19:38.399 comes at a cost. And the cost is people in 0:19:38.440 --> 0:19:41.679