New Zealand: Australia's most profitable customer?

Aotearoa New Zealand used to be part of Australia (to the European settlers at least). For around 50 years until 1841, our country was officially part of New South Wales.

We have long since become our own nation but there is something still distinctly Australian about what is arguably our most profitable industry, financial services.

Last year, the big four Australian banks hoovered up around $5.5 billion net profit after tax (NPAT) - a new record. 

To put this in perspective, $5.5 billion is closing in on the total profits generated by the entire NZX 50, which together earned NPAT of just over $7 billion. 

So, we live in a country where we have four Australian banks that together earn about 80% as much profit as our 50 largest public companies combined. 

It did not use to be this way. Looking back at our history shows how we used to do things differently and how we could still create a more inclusive future. 

More than one hundred years ago, when a group of like-minded doctors came together to found MAS, they wanted to place customers, rather than shareholders first. They did this by creating a mutual, a unique cooperative model where customers are also the owners.

This way of thinking was not unusual at the time. In fact, despite being an agricultural nation, the first cooperatives in New Zealand were financial services companies. AMP was the first mutual insurer, arriving from Australia in 1854. The first banking cooperatives were established soon after, with Nelson Building Society in 1864 and the Southland Building Society (now known as SBS Bank) in 1869. The Government also stepped in from the late 1800s and created market leading companies in banking, general insurance, and life insurance through the Bank of New Zealand, State Insurance, and Government Life. 

However, things began to change from the 1980s. The Bank of New Zealand was sold to National Bank Australia, and big mutual insurance companies such as AMP and National Mutual were demutualised and privatised. Government Life was privatised, listed, and rebranded as Tower Insurance, while State Insurance was sold to IAG, the same Australian company that also swallowed up one of the last remaining mutuals, AMI.

This mentality was still in place when KiwiSaver was set up in 2007. Instead of creating a large publicly owned, low fee default provider (as Sweden did when it established its version of KiwiSaver), the Government awarded five of the six default scheme contracts (and the millions of free customers that went along with them) to foreign-owned banks and insurance companies. Today, the KiwiSaver industry generates over $650 million in fee revenue each year and based on assets under management, foreign-owned providers have over 60% market share.

Our insurance industry is no different. General insurance is essentially a duopoly ruled by two Australian behemoths, IAG (which owns State, AMI, NZI, and Lumley) and Suncorp (which owns AA Insurance, Vero, and Asteron). Last year, these two companies raked in about half a billion dollars in NPAT, far more than the largest (partly) New Zealand-owned general insurer, Tower, which made around 4% of the profits of its Aussie competitors. Life insurance is similarly an industry controlled by foreign companies, although profits are harder to calculate. This is because the largest player, AIA Sovereign, owned by Bermuda-based AIA International, earned very little profit over the last two years (around $26 million) on its almost $2 billion in revenues in New Zealand. 

So the reality in Aotearoa today is that we have a highly profitable financial services industry that by and large exports significant dividends to foreign owners. But there is no use being upset or disappointed about it. Instead, reflect on who you choose to spend your money with and how your spending affects your society.

Why? Because you are likely spending more than you think on financial services (one reason why the industry is so profitable). According to Stats NZ and the Financial Markets Authority, the average Kiwi household spends approximately $4,758 on interest payments, $3,395 on insurance premiums, and $240 per contributing member in KiwiSaver fees each year. If your household earns above the average annual income of about $110,000, it is possible you are spending much more on this. 

Choosing to spend your money with financial cooperatives and mutuals not only prevents profits flowing offshore but has wider effects too. For example, over the past year the MAS Foundation distributed $2.5 million to improve health and wellbeing equity throughout Aotearoa New Zealand. This money was used to support a range of community-led initiatives including free eyecare for children who slipped through the system, helping families deal with ante- and post-natal depression, and funding groups to address gang violence and drug addiction in their communities. 

Importantly, as well as supporting charitable causes, socially-minded organisations try to embed their values within their general business. One way we do this at MAS is by investing your KiwiSaver and retirement savings responsibly. Your money is invested in more sustainable companies while avoiding harmful industries like fossil fuels, weapons, and tobacco.

By making an active choice about who you choose to do business with, you can enable positive outcomes like these. Just imagine the difference we could make together if we spent our money consciously instead of shipping it offshore.

While our mutual model is a product of the past, we believe it remains the best way to serve our Members now and into the future. We are not tempted by demutualisation, privatisation, or excess profits. Our Members are our priority, and this remains as true today as it was 100 years ago.

Jules Riley

Senior Growth Manager, Investments, MAS