1 00:00:00,040 --> 00:00:02,600 Speaker 1: So it's being profit time again Westpac last week. An 2 00:00:02,680 --> 00:00:04,240 Speaker 1: Z First cab off the rank this week and the 3 00:00:04,280 --> 00:00:06,120 Speaker 1: number is a large net profit of two point five 4 00:00:06,200 --> 00:00:08,879 Speaker 1: three billion, which is up over twenty percent. And Tonio 5 00:00:08,920 --> 00:00:11,520 Speaker 1: Watson is the am Z CEO and is with us. 6 00:00:11,520 --> 00:00:12,160 Speaker 1: Good morning to. 7 00:00:12,119 --> 00:00:14,040 Speaker 2: You, Good morning mate. 8 00:00:14,080 --> 00:00:18,480 Speaker 1: In general, how comfortable are you talking about numbers this size. 9 00:00:19,800 --> 00:00:22,720 Speaker 2: In general? When you think about the context of our 10 00:00:22,760 --> 00:00:25,480 Speaker 2: size in New Zealand, they are very big numbers and 11 00:00:25,520 --> 00:00:28,120 Speaker 2: a headline growth in a cost of living crisis of 12 00:00:28,160 --> 00:00:31,200 Speaker 2: twenty percent is very uncomfortable. And I think it's just 13 00:00:31,320 --> 00:00:34,400 Speaker 2: trying to get the cut through that that headline number 14 00:00:34,440 --> 00:00:37,240 Speaker 2: has caused by a whole lot of accounting noise around 15 00:00:37,280 --> 00:00:41,560 Speaker 2: our around valuing our derivatives, and the actual underlying number 16 00:00:41,640 --> 00:00:42,680 Speaker 2: is four percent. 17 00:00:42,920 --> 00:00:46,559 Speaker 1: Right, the margin is up three basis points to two 18 00:00:46,600 --> 00:00:48,559 Speaker 1: point six So how do you defend that? 19 00:00:49,960 --> 00:00:52,280 Speaker 2: So, I mean, one way of looking at it is 20 00:00:52,320 --> 00:00:54,280 Speaker 2: that we've had to put in one point two billion 21 00:00:54,320 --> 00:00:56,680 Speaker 2: dollars of extra capital this year as we are meeting 22 00:00:56,720 --> 00:00:59,600 Speaker 2: the new capital requirements. That comes at a cost to 23 00:00:59,680 --> 00:01:03,200 Speaker 2: us other things being equal of ten percent, sorry ten 24 00:01:03,240 --> 00:01:06,600 Speaker 2: basis points. So a three basis point increase in margin 25 00:01:06,640 --> 00:01:09,959 Speaker 2: to me means that our shareholders are wearing part of 26 00:01:10,000 --> 00:01:12,160 Speaker 2: the pain of the additional capital as well, and I 27 00:01:12,200 --> 00:01:14,800 Speaker 2: think that's on balance, is probably fair. 28 00:01:15,080 --> 00:01:17,600 Speaker 1: The RB rewrited these rules, are they going to help 29 00:01:17,640 --> 00:01:21,120 Speaker 1: you out materially and there for us or not? 30 00:01:20,760 --> 00:01:24,560 Speaker 2: Not materially? They RB have put out two proposals. The 31 00:01:24,600 --> 00:01:28,039 Speaker 2: first one has a little bit more of the most 32 00:01:28,080 --> 00:01:30,679 Speaker 2: expensive form of form of capital, which is common actually 33 00:01:30,720 --> 00:01:33,640 Speaker 2: tier one in it, and the second one has more 34 00:01:33,720 --> 00:01:39,640 Speaker 2: overall capital, so the actual So the capital changes put 35 00:01:39,720 --> 00:01:41,840 Speaker 2: upward pressure on pricing. If you want to maintain your 36 00:01:41,880 --> 00:01:46,360 Speaker 2: returns the same, there isn't much difference in that upward 37 00:01:46,440 --> 00:01:48,120 Speaker 2: pressure given those two options. 38 00:01:48,400 --> 00:01:50,480 Speaker 1: So this is a r B wheelhouse. But Niccola Willis 39 00:01:50,480 --> 00:01:52,600 Speaker 1: wanted to rewrite and she wanted something a bit better. 40 00:01:53,240 --> 00:01:55,040 Speaker 1: Has she lost that battle? Then? 41 00:01:55,960 --> 00:01:59,000 Speaker 2: Look, it's still under consultation and so we've put up 42 00:01:59,040 --> 00:02:02,960 Speaker 2: a third proposal, which thinks really balanced, and it's under 43 00:02:02,960 --> 00:02:05,760 Speaker 2: consultation and where we are anxiously awaiting the results. 44 00:02:05,800 --> 00:02:06,800 Speaker 1: So what's your proposal? 45 00:02:07,880 --> 00:02:12,520 Speaker 2: Our proposal is to align with the Australian proposal. They're 46 00:02:12,520 --> 00:02:14,960 Speaker 2: also they're also changing their capital models Australia and New 47 00:02:15,040 --> 00:02:18,680 Speaker 2: Zealand have two of the most the highest capital ratios 48 00:02:18,720 --> 00:02:20,720 Speaker 2: in the world even currently when you align them on 49 00:02:21,080 --> 00:02:24,359 Speaker 2: an international basis. But we think that there's some efficiencies 50 00:02:24,440 --> 00:02:27,480 Speaker 2: not just with banking but in general if we align 51 00:02:27,480 --> 00:02:30,160 Speaker 2: as much to Australia as possible, and if we did 52 00:02:30,200 --> 00:02:33,119 Speaker 2: that we would there will be less there'll be less 53 00:02:33,160 --> 00:02:36,080 Speaker 2: upward pressure and prices, but also we would still be 54 00:02:36,200 --> 00:02:40,320 Speaker 2: maintaining a more conservative capital stance because there is some 55 00:02:40,360 --> 00:02:43,720 Speaker 2: more conservatism in our underlying calculations the way we do 56 00:02:43,760 --> 00:02:45,760 Speaker 2: it in New Zealand. So we feel like it's a 57 00:02:45,800 --> 00:02:46,680 Speaker 2: balanced option. 58 00:02:46,880 --> 00:02:49,320 Speaker 1: So we'll see what's your read on whether you're going 59 00:02:49,360 --> 00:02:52,400 Speaker 1: to get any cut through on that. I don't know. 60 00:02:52,600 --> 00:02:54,480 Speaker 2: I don't know. I mean, the Reserve Bank have actually 61 00:02:54,520 --> 00:02:57,919 Speaker 2: been very very open. They've been listening through the consultation. 62 00:02:58,000 --> 00:03:01,160 Speaker 2: They've been very clear that they want everyone's views. So 63 00:03:01,560 --> 00:03:02,480 Speaker 2: we'll see where that goes. 64 00:03:02,720 --> 00:03:05,280 Speaker 1: How much of this conservatism around the amount of money 65 00:03:05,320 --> 00:03:06,679 Speaker 1: you've got to put a side is based on the 66 00:03:06,720 --> 00:03:09,440 Speaker 1: fact we're small and therefore allegedly fragile. Is that part 67 00:03:09,440 --> 00:03:09,880 Speaker 1: of it or not? 68 00:03:10,520 --> 00:03:14,160 Speaker 2: Look, Mike, I completely agree that we are smaller we're distant. 69 00:03:14,280 --> 00:03:16,840 Speaker 2: We don't have some of the advantages that say Australia 70 00:03:16,880 --> 00:03:19,799 Speaker 2: has with the mining. We don't have a huge market 71 00:03:19,800 --> 00:03:22,680 Speaker 2: on our doorstep. We have weather events. So I can 72 00:03:22,720 --> 00:03:25,760 Speaker 2: completely understand that we should hold more capital in our 73 00:03:25,800 --> 00:03:28,960 Speaker 2: banking system than maybe some other countries. But the question 74 00:03:29,080 --> 00:03:31,320 Speaker 2: is how much more? And we are already right now 75 00:03:31,440 --> 00:03:34,880 Speaker 2: without any more capital going in. Oliver Woman did some 76 00:03:35,000 --> 00:03:37,240 Speaker 2: work for to arb and Z and we're already the 77 00:03:37,320 --> 00:03:40,400 Speaker 2: second highest in the world without the extra capital that's 78 00:03:40,440 --> 00:03:42,200 Speaker 2: still going to go in over the next few years. 79 00:03:42,240 --> 00:03:46,200 Speaker 1: But you still maintain that if that number was significantly lower, 80 00:03:46,320 --> 00:03:49,960 Speaker 1: your margin would be lower, and therefore they are directly linked. 81 00:03:51,240 --> 00:03:54,800 Speaker 2: Not lower. So the thing to really remember is that 82 00:03:54,840 --> 00:03:56,760 Speaker 2: this is capital that we'll go in in the future. 83 00:03:56,920 --> 00:04:00,440 Speaker 2: So the offset is less output pressure on price itself. 84 00:04:00,440 --> 00:04:02,520 Speaker 2: We have to put less capital in in the future, 85 00:04:02,840 --> 00:04:05,640 Speaker 2: there's less output pressure on prices in order to maintain 86 00:04:05,880 --> 00:04:08,080 Speaker 2: you know, the modestly above cost of capital returns that 87 00:04:08,120 --> 00:04:10,000 Speaker 2: we have at the moment, which is what we need 88 00:04:10,040 --> 00:04:12,120 Speaker 2: to deliver to our shareholders for them to invest twenty 89 00:04:12,120 --> 00:04:13,320 Speaker 2: billion dollars in New Zealand. 90 00:04:14,080 --> 00:04:16,360 Speaker 1: Yeah, but two point six is higher than Australia. This 91 00:04:16,400 --> 00:04:18,359 Speaker 1: is the great quandary that people keep asking me to 92 00:04:18,400 --> 00:04:21,840 Speaker 1: ask you about. And the argument has always been, oh, 93 00:04:21,880 --> 00:04:23,520 Speaker 1: but here we have to put so much more money 94 00:04:23,520 --> 00:04:25,640 Speaker 1: aside because there are RB tells us. Is that no 95 00:04:25,720 --> 00:04:26,599 Speaker 1: longer your argument? 96 00:04:26,800 --> 00:04:29,480 Speaker 2: Yeah? No, no. So if you think about our overall 97 00:04:29,480 --> 00:04:31,360 Speaker 2: margin at two point six that's for our sort of 98 00:04:31,440 --> 00:04:35,200 Speaker 2: retail and commercial businesses, that compares to our Australian retail 99 00:04:35,200 --> 00:04:38,880 Speaker 2: and commercial business has added together a two point thirty nine, 100 00:04:38,920 --> 00:04:42,359 Speaker 2: so a twenty one basis point difference that is more 101 00:04:42,440 --> 00:04:44,520 Speaker 2: than accounted for. If you look at the Oliver Wyman 102 00:04:44,600 --> 00:04:47,800 Speaker 2: difference in capital between Australia and New Zealand, that difference 103 00:04:47,839 --> 00:04:49,919 Speaker 2: is probably a cost of say thirty basis points. So 104 00:04:50,000 --> 00:04:52,240 Speaker 2: that's more than accounted for by the extra capital we 105 00:04:52,279 --> 00:04:52,640 Speaker 2: have here. 106 00:04:52,760 --> 00:04:55,919 Speaker 1: Okay, do you still what does it feel like running 107 00:04:55,920 --> 00:04:59,560 Speaker 1: a successful business which you in disputably are and have 108 00:04:59,640 --> 00:05:01,560 Speaker 1: a fine Nance minister constantly at you. 109 00:05:03,400 --> 00:05:06,040 Speaker 2: Look, she does her job and I do mine, and 110 00:05:06,160 --> 00:05:09,240 Speaker 2: we try and run a really strong, safe, trusted bank 111 00:05:09,279 --> 00:05:11,680 Speaker 2: for New Zealanders. The government's role is to make sure 112 00:05:11,680 --> 00:05:13,720 Speaker 2: that New Zealanders get the best deal they possibly can 113 00:05:13,760 --> 00:05:15,279 Speaker 2: out of all the industries in New Zealand. 114 00:05:15,640 --> 00:05:18,960 Speaker 1: Do you think we are all have a genuinely open 115 00:05:19,000 --> 00:05:21,920 Speaker 1: and competitive banking market for the average punter to get 116 00:05:21,960 --> 00:05:22,720 Speaker 1: a good deal. 117 00:05:22,520 --> 00:05:26,039 Speaker 2: With Yes, I do. I mean yes, one hundred percent. 118 00:05:26,560 --> 00:05:29,200 Speaker 2: Our staff are out there every day competing to win 119 00:05:29,279 --> 00:05:31,360 Speaker 2: business and competing hard. We are looking at what our 120 00:05:31,400 --> 00:05:33,200 Speaker 2: competition are doing constantly. 121 00:05:33,920 --> 00:05:37,640 Speaker 1: SBS they hoovered up six thousand customers in the last year. 122 00:05:38,000 --> 00:05:40,920 Speaker 1: Is that proof that there is competition and therefore people 123 00:05:40,960 --> 00:05:43,080 Speaker 1: can move and will move if the deals are good. 124 00:05:43,720 --> 00:05:46,880 Speaker 2: Absolutely. We've seen an average in some months it's been 125 00:05:46,920 --> 00:05:49,960 Speaker 2: more an average of twenty five percent of homelan customers 126 00:05:49,960 --> 00:05:54,960 Speaker 2: switching within the industry over the last year. So twenty 127 00:05:54,960 --> 00:05:57,120 Speaker 2: five percent of people switching every time their homeland's up 128 00:05:57,120 --> 00:05:57,720 Speaker 2: for prefixing. 129 00:05:57,800 --> 00:06:01,760 Speaker 1: I think that's huge, right Ed McKnight The Opes Partners 130 00:06:01,760 --> 00:06:05,160 Speaker 1: thing that he's done on banks and their interest rates, No, 131 00:06:05,279 --> 00:06:07,600 Speaker 1: I don't all right. It doesn't matter that the upshot 132 00:06:07,640 --> 00:06:10,240 Speaker 1: is he looked at over a period of time as 133 00:06:10,279 --> 00:06:12,400 Speaker 1: to who was first out of the blocks in terms 134 00:06:12,440 --> 00:06:16,120 Speaker 1: of offering the best rate. B and Z seems the 135 00:06:16,160 --> 00:06:18,719 Speaker 1: best along with Westpac. You get there eventually on the 136 00:06:18,760 --> 00:06:21,640 Speaker 1: longer term, money the point being is once you shake 137 00:06:21,720 --> 00:06:24,120 Speaker 1: it all down, you guys are all the same at 138 00:06:24,120 --> 00:06:26,080 Speaker 1: the end of the day. And this backs up Nicola 139 00:06:26,080 --> 00:06:28,160 Speaker 1: Willis's argument, at the end of the day, it's all 140 00:06:28,200 --> 00:06:30,720 Speaker 1: the same. There is no real competition. 141 00:06:31,440 --> 00:06:34,359 Speaker 2: It's interesting because as someone puts rates down, others will follow. 142 00:06:34,400 --> 00:06:37,240 Speaker 2: That's a very competitive market. But the suggestion there is 143 00:06:37,640 --> 00:06:40,040 Speaker 2: once everyone matches us, we should continue putting them down. 144 00:06:40,120 --> 00:06:41,960 Speaker 2: And then everyone matches and continue putting them down, and 145 00:06:42,000 --> 00:06:44,159 Speaker 2: then there comes a point that it's unsustainable and we 146 00:06:44,200 --> 00:06:46,359 Speaker 2: don't therefore have the returns that mean that we're comfortable 147 00:06:46,360 --> 00:06:48,960 Speaker 2: to keep lending to Kiwi. So the sort of a 148 00:06:49,000 --> 00:06:50,080 Speaker 2: the sort of a you know, do we want a 149 00:06:50,120 --> 00:06:51,960 Speaker 2: vicious cycle to the bottom or that will mean we 150 00:06:52,000 --> 00:06:54,440 Speaker 2: have less strong and stable than sustainable banks. 151 00:06:54,800 --> 00:06:57,960 Speaker 1: Yeah, but so am I? Am I a simpleton? So 152 00:06:58,320 --> 00:07:00,599 Speaker 1: just back to that business. All I've seen through the 153 00:07:00,640 --> 00:07:03,800 Speaker 1: GFC and through COVID is you guys, generally the big 154 00:07:03,839 --> 00:07:07,080 Speaker 1: four here are fantastically successful and profitable, and well done 155 00:07:07,160 --> 00:07:08,400 Speaker 1: to you for that. Why do you need to put 156 00:07:08,440 --> 00:07:10,160 Speaker 1: any money aside? You know what you're doing. 157 00:07:12,080 --> 00:07:14,360 Speaker 2: You know that we have had The GFC wasn't an 158 00:07:14,400 --> 00:07:16,680 Speaker 2: existential crisis in New Zealand, it certainly was in other 159 00:07:16,720 --> 00:07:18,480 Speaker 2: parts of the world. I mean, that's why I'd say 160 00:07:18,480 --> 00:07:20,800 Speaker 2: that we you know, we are well capitalized. We've done 161 00:07:20,840 --> 00:07:22,800 Speaker 2: a lot since the GFC, but don't forget that in 162 00:07:22,840 --> 00:07:25,680 Speaker 2: COVID we our profit drop thirty percent and the GFC 163 00:07:25,800 --> 00:07:27,480 Speaker 2: we had one year we made one hundred and ninety 164 00:07:27,520 --> 00:07:30,440 Speaker 2: million dollars and that's a lot less than right now. 165 00:07:30,480 --> 00:07:33,520 Speaker 2: So you know, when those real crises, you see bank 166 00:07:33,560 --> 00:07:36,120 Speaker 2: profits drop a lot, and so we need to be 167 00:07:36,240 --> 00:07:38,360 Speaker 2: ready and have a good capital base to protect us 168 00:07:38,400 --> 00:07:39,400 Speaker 2: from those real crises. 169 00:07:39,480 --> 00:07:41,160 Speaker 1: How many people you got working in your bank at 170 00:07:41,200 --> 00:07:43,360 Speaker 1: the moment who come to you in your office periodically 171 00:07:43,400 --> 00:07:45,440 Speaker 1: and go, this AI tech thing is going to blow 172 00:07:45,600 --> 00:07:47,559 Speaker 1: and that might have some sort of bottom line effect 173 00:07:47,640 --> 00:07:48,320 Speaker 1: for us. 174 00:07:49,720 --> 00:07:52,600 Speaker 2: We talk about ALI a lot. It's got a lot 175 00:07:52,640 --> 00:07:54,840 Speaker 2: of uses. We also want to be very cautious that 176 00:07:54,880 --> 00:07:58,360 Speaker 2: we don't let something loose that you know, hallucinates for 177 00:07:58,440 --> 00:08:01,720 Speaker 2: our customers. So you know, it's exciting, but I guess 178 00:08:01,720 --> 00:08:05,000 Speaker 2: it's exciting, but with absolute caution around it. 179 00:08:05,160 --> 00:08:07,880 Speaker 1: Explain to me the insolvency numbers we covered yesterday and 180 00:08:07,880 --> 00:08:09,880 Speaker 1: I can't remember who did it. But insolvencies are up 181 00:08:09,920 --> 00:08:13,680 Speaker 1: forty percent, the money you've put aside for bad debt 182 00:08:13,800 --> 00:08:15,840 Speaker 1: is down. How can the two be true? 183 00:08:16,120 --> 00:08:19,520 Speaker 2: Yeah, because we will have provided so any of our 184 00:08:19,520 --> 00:08:23,880 Speaker 2: customers that are in that group of customers that are 185 00:08:23,920 --> 00:08:27,320 Speaker 2: looking like the approaching insolvency, we would have probably provided 186 00:08:27,360 --> 00:08:30,200 Speaker 2: for them in the past, not this year, because we'll 187 00:08:30,240 --> 00:08:32,920 Speaker 2: be looking at our results, looking at what the economy 188 00:08:32,960 --> 00:08:34,600 Speaker 2: is looking like. We sort of take a forward view 189 00:08:34,600 --> 00:08:37,880 Speaker 2: of the economy and we tend to provide what we 190 00:08:37,960 --> 00:08:40,680 Speaker 2: call collective provision upfront, which is just what's the risk 191 00:08:40,720 --> 00:08:43,120 Speaker 2: in our book of things happening. So we'd have already 192 00:08:43,120 --> 00:08:43,760 Speaker 2: provided for that. 193 00:08:44,160 --> 00:08:47,000 Speaker 1: How bullish for twenty six are you for New Zealand's inc. 194 00:08:47,760 --> 00:08:53,120 Speaker 2: Oh, I'm cautiously optimistic. There are some green shoots out there. 195 00:08:53,160 --> 00:08:56,240 Speaker 2: It's still tough, there's no question about that. It's particularly 196 00:08:56,240 --> 00:08:59,040 Speaker 2: tough in places like Auckland and Wellington, say, compared to 197 00:08:59,080 --> 00:09:01,240 Speaker 2: the South Island. Doesn't christ Church recently and that was 198 00:09:01,840 --> 00:09:04,720 Speaker 2: pretty pretty exciting place at the moment. Actually, I think 199 00:09:04,760 --> 00:09:08,360 Speaker 2: you're seeing some of the rural economy impact coming through 200 00:09:08,440 --> 00:09:10,480 Speaker 2: flowing through to the cities. But there's some real there 201 00:09:10,480 --> 00:09:13,880 Speaker 2: are some actual real positives. If you think about the 202 00:09:13,920 --> 00:09:16,680 Speaker 2: pain of the last few years, it's also sort of 203 00:09:16,800 --> 00:09:18,760 Speaker 2: cleared the decks for the next up swing. So we've 204 00:09:18,800 --> 00:09:23,280 Speaker 2: got real house prices, they've unwhelmed the COVID bubble. We've 205 00:09:23,280 --> 00:09:26,440 Speaker 2: got household and firm debt lower than it was pre 206 00:09:26,559 --> 00:09:29,560 Speaker 2: COVID as a share of GDP. We've got inflation hopefully 207 00:09:29,600 --> 00:09:34,280 Speaker 2: hopefully touchwood under control. We've got imports reducing, exports growing. 208 00:09:34,280 --> 00:09:36,520 Speaker 2: So there's a lot of our card data showing that 209 00:09:36,559 --> 00:09:38,800 Speaker 2: a lot of the categories are now spending is up 210 00:09:38,880 --> 00:09:40,719 Speaker 2: to So that's people just getting a little bit more 211 00:09:40,760 --> 00:09:43,679 Speaker 2: confidence to spend now rather than to sort of re 212 00:09:43,840 --> 00:09:45,840 Speaker 2: establish their buffers, which is I think what they've been 213 00:09:45,880 --> 00:09:48,720 Speaker 2: doing as interest rates been coming down to date. So 214 00:09:48,840 --> 00:09:50,600 Speaker 2: I think, you know, cautiously optimistic. 215 00:09:50,920 --> 00:09:52,600 Speaker 1: Good to talk to, you appreciate it as always an 216 00:09:52,640 --> 00:09:54,559 Speaker 1: Tonio Watson, who's the boss of the a m Z. 217 00:09:55,280 --> 00:09:58,160 Speaker 2: For more from the MI Casking Breakfast, listen live to 218 00:09:58,280 --> 00:10:01,360 Speaker 2: news talks there'd be from six ing weekdays, or follow 219 00:10:01,400 --> 00:10:02,960 Speaker 2: the podcast on iHeartRadio.