Agenda Transcript: Phil Goff & Sam Knowles

RAWDON: Within recent weeks nine New Zealand finance companies have gone into receivership and this week the Chief Executive of Kiwibank Sam Knowles broke his profession's normal reluctance to embrace controversy with a claim that there were likely to be more finance companies to go broke, he says investors are pulling their money out of the companies to invest in banks. Mr Knowles joins me now. Kiwibank of course Mr Knowles is one of those banks profiting from the demise of others, good for you but surely there's cause for concern.

SAM KNOWLES – CEO Kiwibank
Yes certainly I think in the later economy and particularly for investors there is concern though certainly in the global context this is really quite a small issue.

RAWDON: Is it going to continue as more and more investments mature, more and more investors pull out of finance companies?

SAM: I guess it's really up to the investors to make their individual decisions I think it will certainly continue for a number of weeks as more certainty develops in the market and people understand you know what a good finance company is and what a not so good finance company is.

RAWDON: But it's difficult to tell isn't it because the margin of risk apparently is so little, maybe just 2% in it.

SAM: Yes I think certainly there are good finance companies, the bigger finance companies with diversified portfolios, the finance companies with credible ratings yeah they're very solid companies.

RAWDON: So you'd be advising people not to rush things not to act in a sort of impulsive manner here?

SAM: No I think all investment has to be considered, if you’ve got professional advisors take that advice, if you haven’t you know stick with the larger and rated companies.

RAWDON: Just explain what happens to the funds within finance companies.

SAM: Well finance companies are very similar to banks but they just take slightly higher risks, so there's an overlap there. There's generally two sorts of finance companies in our market, there's the ones that have the diversified portfolio and they're as I say like banks and they invest or lend their money to businesses and consumers. There's other finance companies that are more in the nature of finance vehicles for their underlying business and I guess those are the ones that are a bit more challenged when it comes to a risk environment.

RAWDON: So they might be lending to big property developers?

SAM: Yes they might be lending, or they might be lending on to some of their in fact their own development business as we've seen with some of the finance companies that have fallen over recently.

RAWDON: And by lending to subsidiary companies of a similar type.

SAM: Yes lending to associates.

RAWDON: So if a large developer is going to find it harder and harder to one of these finance companies and take out the sort of loan they need to continue their development or complete their development what does that mean for real estate?

SAM: Well I guess it depends on how many developers are there and what the underlying demand is for the development, certainly in the commercial area there's still plenty of demand in the economy, I think in the consumer area with higher interest rates we're certainly seeing demand coming off with less demands for mortgages in the market.

RAWDON: And that sort of creates a bit lf a catch 22, I've just been down to Mt Maunganui which is an example of a huge growth area, you’ve got developments at all stages from bare earth trying to sell the first few apartments up to almost complete high rises still with dozens of apartments for sale, so if the heat's come out of the market and the developers are going to find it harder to borrow the money what does that mean?

SAM: Well it does mean that there's probably some good deals for consumers coming up, it also means that there probably will be less development in the future, but largely if you're talking about the apartment and the residential markets the key driver there is employment. As long as employment stays up we wouldn’t expect to see a significant reduction in the values of residential property.

RAWDON: What about other loans would it become harder for a consumer to borrow for a car or a holiday?

SAM: I think it becomes more difficult, if your in a credit stress situation or if you’ve got a poor personal credit rating, but no certainly banks and finance companies are keen to lend to people who have go the income to service their borrowing.

RAWDON: And if it becomes harder for a business to borrow they’ve surely got to therefore maintain their profits through - or they’ve got to create their own wealth for development through cutting costs, i.e. employment or by increasing the cost of their product which again impacts on consumers, that’s quite gloomy isn't it?

SAM: It can have those flow on effects but because we've got other economic stimulus coming from I think you talked about the dairy industry and other industries, it doesn’t necessarily have to have a big impact on the economy.

RAWDON: If more and more investors flock to the big banks what impact would that have on interest rates?

SAM: Probably no significant impact because the bigger banks fund a lot of their investment from offshore, you know it's really what's happening clearly with the Reserve Bank and interest rates overall that drives the rates that consumers feel.

RAWDON: Mr Knowles you were quoted this week as expecting these problems for the last couple of years, what could have been done differently?

SAM: Well I think the things that are being done now around disclosure and improving the disclosure regime, improving the supervision regime, so I think all the right things are being done now, and possibly with the benefit of hindsight they should have been hurried along you know when they were first I guess identified a couple of years ago.

RAWDON: So we're reacting in the right way. Just explain quickly about the regulations which are gonna come in about disclosure.

SAM: Yes I'm not completely up with those but certainly from what I understand the trustees are gonna be given more power to get the information they need and that’s in the short term, in the longer term there's a new regime that requires ratings, all finance companies to have ratings and improve disclosure and be supervised effectively by the Reserve Bank.

RAWDON: And those regulations are gonna go far enough do you think?

SAM: It's always hard to tell, there's a real danger in these types of situations that you over-react and put a lot of cost into the financial sector that you know in the long term is not good for New Zealand.

RAWDON: What about the half a dozen companies which might possibly go under in the next six weeks, I mean that’s expected now isn't it?

SAM: It's very hard to talk about the numbers but undoubtedly there's some of the smaller companies are under pressure, but you really have to look at the individual companies as to whether it might one or it might be six, no I wouldn’t really be able to comment on either what they are or how many to expect.

RAWDON: I just want to quote something that Leanne Dalziel said this week "the risk is no greater today than it was last week last year, there is no reason for good companies to go down with the bad". Is that realistic or complacent?

SAM: Well I think the challenge here is the confidence in the uncertainty factor and the real danger is in fact that some of the good companies do in fact go down because they get tarred by some of the poorer companies, so it's certainly very challenging for them.

RAWDON: Are we looking at a doom and gloom scenario for the next 12 months?

SAM: No I certainly don’t see doom and gloom I think this is an adjustment that occurs in the economies, you have these types of adjustments in many different sectors and this is just one we're having in the financial sector.

RAWDON: We're joined by our panel Nevil Gibson and Deborah Hill Cone. Deborah what's your take on the demise of the finance companies?

DEBORAH HILL CONE – Columnist
Oh well I have a question for Sam, I wondered whether the boom in finance companies may have been fuelled by the failings of our major Australian owned trading banks, because our Australian banks have shied away from any sort of lending that isn't secured over a property and isn't simple and easy that they really are minimising their own risk, hasn’t that left the way open for finance companies to step in and fund a lot of that sort of lending?

SAM: Yeah I don’t think it's quite that simple because I think you'll find that some of the finance companies are owned by banks and most of the banks do some types of lending which are similar to finance company lending, no I think they have a natural position talking slightly higher risks that require slightly more hands on management.

DEBORAH: Well I mean has Kiwibank stepped in to do any other sorts of lending that’s offering an alternative to the Australian owned banks?

SAM: Certainly in the consumer field we do a lot of debt consolidation and we do 100% lending for first home buyers which in that space, but no we don’t do vehicle and equipment lending because that is really quite specialist and you do need a very specialist manager for that activity.

DEBORAH: Yeah but there definitely was a C change among the banks a few years ago where they deliberately moved away for that much riskier lending and decided that they basically would – they just didn’t want to get into that business isn't that true?

SAM: No I think the finance company sector has always been significantly different in its skills, I think what we're seeing in the finance company is to do with the structuring on the funding side it's not really a lending issue, no there's plenty of space for specialised finance companies to do very specialised lending that doesn’t fit well with the cultures of banks.

DEBORAH: Yeah but you say it's not a lending issue but when you're lending for second hand cars and you know that are such dodgy loans it has to be partly a lending issue.

SAM: What I mean in the structure of the industry it is sensible for banks not to do second hand car loans, and it would be sensible for finance companies not to lend as much as they do on second hand cars.

RAWDON: Nevil I'll bring you in here, you had a question for Mr Knowles.

NEVIL GIBSON – Editor, National Business Review
Well Sam one of the things you said in your announcement earlier this year with your excellent result was that money is going into the banks and coming out of the finance companies, but from the investors' point of view virtually they're going to be losing their capital because if inflation stays high the returns that you give after tax mean that essentially people are losing their capital which is probably why the finance company rates were attractive even if the margin is not reflecting the risk.

SAM: Yeah I think certainly in New Zealand we're probably experiencing the highest real rates of return, deposit rates in banks and term deposit rates are in the 8 to 9% level, inflation's still reasonably low and so those real rates of return 4-5% are as high as you'll find anywhere around the world.

NEVIL: Yeah I think your attitude toward the possible downward spiral in the finance companies is a little bit too much for me because I think there's probably among some commentators anyway quite a good case for the Reserve Bank to do something that would restore confidence in the sector and there'd be quite a number of academics would agree with that because the whole system could be at risk and you're saying it will take the good with the bad, surely that’s a matter of major concern to the financial system overall.

SAM: Yes it is a matter of major concern, I guess it's to understand the degree and I'm sure people you know in the Reserve Bank and certainly the Securities Commission are thinking through and getting that information and making those calls, but it is a massive call to you know step in and effectively underwrite risk in the financial sector, so I can understand why they're reluctant to do it. I'm not close enough to actually know the detail of what's going on to make the judgement as to what's good for New Zealand.

NEVIL: But you said the good and the bad, surely it's pretty easy to sort out those companies that are deserving of maintaining some degree of stability while others probably have to be taken over, absorbed by other institutions possibly including your own.

SAM: I think many of those good companies will have quite robust balance sheets and funding structures where they’ve got lines from banks and lines from offshore term funding structures, so you have to get into that level of detail to understand what the risks are here.

NEVIL: So what's your general feeling though if there is going to be further instability and investors are looking around for something they can be sure of, because neither you nor me know which is the next one to go down.

SAM: I think if you stick with the conventional rules of you know looking at the ratings, looking at the ownership structures, talking to the professional advisors, you know this is the time for sort of calmness and going back to the conventions of investment and making your decisions based on those conventions.

DEBORAH: Sam, I'm just wondering getting back to the lending, you specialise in often low income customers, with what we're seeing in the States with a huge availability of credit now people are having second thoughts about whether that’s such a great thing, aren’t you a bit worried about the fact that you are lending to a lot of people who don’t have much income and you're encouraging them to borrow and get more into debt?

SAM: Yeah we certainly lend across the board not just to low income people, I guess the thing about a bank like Kiwibank is we're a relatively conservative lender, because we think that’s the responsible thing to do, so we do check people's ability to pay, we check their credit records and if we think there's any chance that they can't pay us back then we don’t lend it to them, I think that’s very different to the US situation where there's a lot of commission based salespeople out there who are really just trying to make their commission and lending whatever they can.

RAWDON: And I guess that conservatism is reflected in the 61% profit which Kiwibank has shown. Is that a legitimate profit, is that real?

NEVIL: Oh yes and the cost of interest had gone up a bit so their profit probably should have been greater for the revenue they’ve brought in but it's a very good result.

DEBORAH: But don’t you just have the government there backing you up anyway?

NEVIL: Oh not they’ve doubled their business in a year and that’s pretty good for any bank I think.

RAWDON: What about feedback from your readers what have you been getting over the finance company demise?

NEVIL: Oh there's definitely great concern in the business community because the financial sector is very important to them for the things that Deborah's been talking about, I mean they oil the wheels of commerce and traditional banks are not good at lending money for business and growth and entrepreneurs won't even go near them, we know all the stories about banks pulling their funding and that’s the danger is that if some of these credit lines dry up even in the major banks they’ll call in the money from the companies that might be a little bit stretched and once you get on that spiral the jobs will be lost and the whole economy will go down pretty quickly.

RAWDON: Nevil, Deborah, and Sam Knowles thank you very much.

RAWDON: We're going to Guyon Espiner at APEC. Guyon in a grouping of 21 economies with all the different views on trade and environment what can APEC really achieve in this?

GUYON: Well it's very difficult to get anything really tangible from trade out of APEC, remember it was set up as a forum in Australia actually in 1989 and then about 1993 they set these goals for free trade. Now we're supposed to have developed countries with free trade by 2010 well that’s clicked by pretty quickly, we're not far away from that, no one really believes that’s going to happen, there's been talk of an APEC wide free trade area which is sort of now just gradually being studied, but as you say all those different – there's so many different types of economies in this that it's very very difficult to get any overall agreement.

RAWDON: So is there any point to it I suppose as far as trade goes?

GUYON: Well that’s the funny think about APEC it's a non binding forum, so you’ve had those goals that were set and people make their own gains within that, there's similar things going to happen with climate change, there'll be sort of aspirational sort of goals and then countries work to see what they can achieve without actually being locked into it. Now some see that as the strength of APEC that leaders from diverse countries the rich and the poor and the developing and with different ideologies, you’ve got one party Communist states like Vietnam and China, alongside you know the emerging South Korea economies and the rich democracies, so some people see the strength of APEC is you can get all those different leaders, all that diversity, without actually locking them in. The weaker side is that things tend to drift and no one actually gets pinned down to anything.

RAWDON: Thank you Guyon, well just back from APEC is New Zealand's Trade Minister Mr Phil Goff, he's in our Wellington studio and joins me now. Mr Goff two months ago the World Trade talks looked as though they may be heading for collapse. Is Dohar up and running again is it full stream ahead?

PHIL GOFF – Minister of Trade
Good morning Rawdon, it's a bit like a roller coaster actually it's up one moment down the next but our consistent stand on it is that can happen in World Trade is to conclude this trade round, not only for New Zealand's sake and it benefits us but it benefits the developing world, in fact every country benefits. So APEC was important, APEC was important because the 21 economies represented there are 50% of world trade, 60% of GDP. When you get the leaders meeting as they will today a strong statement from them and an instruction to their negotiators to re-engage in the process now happening in Geneva is really going to be important.

RAWDON: The maybe 50 or 60% of world trade but they're a small portion of the numbers of countries involved in Dohar though aren’t they, we're talking about 150 nations there.

PHIL: Yeah certainly there's 151 members in the WTO so you get an idea that an organisation that’s based on consensus decision making with 151 members it's never going to be easy, but these economies are important, 50% of world trade, 60% of the world's GDP, when you get economies like the United States and China coming together in a forum that’s going to make a difference and what we as Trade Ministers did was to set out a statement that I think is quite strong if it's adopted by the leaders it sends a signal, but more than just a statement you need action on that statement and I moved in the Ministers' Meeting that the Ministers' Forum send an instruction to our WTO representatives to engage around the chair's texts, having the countries engaged, having them committed to the process and encouraging other countries outside APEC to do so is very important.

RAWDON: What about climate change, I mean are you confident that APEC can achieve something?

PHIL: Well I spose what it's achieved is what Helen Clark was able to achieve last year, she fought to get it on the agenda last year and succeeded, but that was the first time ever, this time it's seen as a focal point of the APEC economic leaders' meeting. Now it's not a decision making body as Guyon said before, he's quite right it's a forum it's a discussion point, but we've got coming up in Bali in December the United Nations framework convention on climate change, and again if you get a signal from the key groups at APEC to that forum then I think we can get that process moving forward.

RAWDON: What do your counterparts think of New Zealand's anti nuclear stance?

PHIL: Well I think we have some countries that agree with us and some that disagree with us. I guess many would say that New Zealand has the luxury of having 70% of its electricity generation right now already sustainably generated, hydro and geothermal…

RAWDON: We're still burning a lot of coal.

PHIL: Yeah that’s true but compared to any of the other countries that we partner with we have a high degree of sustainable energy. Not only do we have a degree of sustainable energy but we can move towards a realistic expectation of practically the whole of our generation becoming sustainable with wind, with solar, with energy efficiency.

RAWDON: And that’s gonna take time. Is it potentially affecting whether some people will do business with us?

PHIL: No, no, look what we're saying about nuclear energy is we've made a decision for ourselves. For New Zealand economically it doesn’t make sense, environmentally it doesn’t make sense and we have realistic alternatives. We are not trying to say that other countries can't follow their own path, obviously under the International Atomic Energy Agency countries have the right to develop the peaceful use of nuclear energy. What we are saying however is that the proper safeguards, it's about non proliferation, about safety, about security, about waste disposal, need to be part of that debate.

RAWDON: Nevil is the anti nuclear stance an example of your editorial about anti growth nations like sustainability?

NEVIL: Well it's interesting that on the nuclear debate this week the Economist comes out and basically sums up the issue where it is and there's no question this is going to be growth energy of the next 20 years and the economics of nuclear have never made more sense and the safety issue while it's still there is very minimal now, there's going to be nuclear power stations built all across India, China, and North and South America, possibly – and Europe of course is the centre of it already.

DEBORAH: Mr Goff I was just wondering, Labour has said that it's New Zealand's position that they don’t want nuclear energy, I just wondered what that was based on and whether it was possible that you're a bit out of date with what mainstream thinking is on nuclear energy in New Zealand?

PHIL: I don’t think so, I think in terms of New Zealand we have a reputation that we're very proud of and we have a branding, it's clean green 100% pure New Zealand. Economically I don’t think anybody's put up a convincing argument that atomic energy in New Zealand makes sense, not when we have the sustainable alternatives. I think if you go out there and you do your polling you'd find that the vast majority of people don’t believe that nuclear energy needs realistically to be looked at as an alternative by New Zealand at this point.

DEBORAH: So what you're saying is it's mainly about branding and spin rather than about any actual sort of sound objections to the technology?

PHIL: Well you know that branding isn't spin, branding is critically important to our trade to our tourism, so I'd reject any notion that it was spin. No we have genuine concerns that nuclear energy proliferation can also lead to the proliferation of materials that can be used in nuclear weapons, that’s not just New Zealand's concern that’s a world wide concern. We have concerns about waste disposal on products produced by nuclear energy that remain active and dangerous literally for thousands of years, we have concerns about safety and security, they're all legitimate concerns, they're recognised as legitimate concerns and they're being dealt with in the international arenas alongside the development of nuclear energy. It may well be that countries like India and China – China's building I think a new thermal power station, one a week every week of the year, it may well be that they look at the nuclear alternative. It's not for us, it maybe for them, but if they're going to use it we want the safeguards built around that to the maximum extent and I think that’s a reasonable request.

RAWDON: Mr Goff doesn’t that put the government in a very difficult position almost contradicting itself to say to potential trading partners, we don’t like – we want to watch very carefully how you're doing it and we don’t agree with it.

PHIL: No we're saying it's not for us, you know it's not for us…

RAWDON: But you guys go ahead and do it.

PHIL: Well that’s been the case for the last 30 years under the International Atomic Energy Agency of which we are a part. The peaceful development of nuclear energy is a reality in the world, we're not telling the rest of the world that they have to stop, we're saying it's not for us, if you're gonna go down that track it's not our preferred track, our preferred track is sustainable energy but you need to have those safeguards in place and we'll push that and we won't be a lonely voice in that regard because I think everybody is aware that while nuclear energy can produce benefits it also poses risks.

RAWDON: Sorry Mr Goff I'm addressing the panel here. I get the feeling that there is a lot more debate within the community about whether we continue on our anti nuclear stance or whether we should embrace nuclear as a power alternative, I mean there's a sort of a split down the middle for both for and against, is there still that general consensus of anti nuclear stance in the country?

NEVIL: Well you can't really have it both ways, you can't have climate change and say we're going to reduce carbon emissions and not go the nuclear way which is of course where most of the world's gonna go. Now the question I'd ask Mr Goff is where is the future of our sustainable energy is it just wind power because there's no hydro development that’s going to be allowed, thermal rules itself out under climate change although that’s obviously a cheaper way to do it and the Chinese are following that but they’ll switch to nuclear, so I'd like to know where our future energy needs are going to come from unless we start 1% growth in which case we probably won't have a problem we can put it off, but if you get a 4 or 5% growth we're gonna run out of power pretty quickly.

RAWDON: Final word to you Mr Goff.

PHIL: Let me answer that, I think that the things I mentioned to you before Nevil, there's a huge potential in wind energy, that can produce a lot more energy than we're currently doing, we're just starting to move down that path now, there's solar energy which also has the potential, there's energy efficiency which is also very important, all three of those things are for New Zealand real and realistic alternatives to nuclear energy. I don’t think and the fact that the National Party has just flipped flopped across to supporting Labour's position on a nuclear free New Zealand indicates where they think the majority of New Zealand public opinion is at. I'm confident that most New Zealanders are with us in looking and putting emphasis on sustainable energy alternatives not nuclear power.

RAWDON: Well that we shall see, Mr Goff thank you very much for joining us.

RAWDON: Deborah you'll be delighted that the Rugby World Cup's kicked off this morning what do you think the big issues will be this week for you?

DEBORAH: I think it will be a week of cheerleading with the Rugby World Cup and all the ra-ra stuff about Fashion Week, but the story I liked this week was Lloyd Jones getting on the short lists for the Booker Prize for Mr Pip which was the thing I was doing my cheerleading about.

RAWDON: Nevil what are we going to see on the front page of the NBR?

NEVIL: Well we're going to be hearing a lot of American accents I think because the largest delegation ever of American businessmen's in Auckland for the next few days and I think it's important because we can't get a free trade agreement, I think Mr Goff pointed out it's virtually impossible to do those sort of deals these days, but the nature of business with America's changing, there's more New Zealand companies setting up in America and getting round it that way, in fact there's a chocolate factory over there, Fisher & Paykel are moving their appliances there and that’s going to be the nature of business between New Zealand and the world's largest market.

RAWDON: So America's the new frontier for New Zealand business?

NEVIL: Well I think it's a cleverer way of doing it, you see the New Zealand Institute this week spoke about weightless exports which means you know intellectual stuff, commercial intellectual property that sort of thing and that’s going to be the future.

ENDS

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