BANK OF NEW ZEALAND.

Dominion, Volume 6, Issue 1793, 4 July 1913, Page 4

BANK OF NEW ZEALAND.

9 QUESTION OF CAPITAL. THE DIRECTORS' PROPOSALS , THREE INTERESTS. The chairman of the Bank of New Zealand (Mr. Harold Beauchamp) has handed us for publication the following memorandum, which embodies the, recommendations mads by the board of ths bank to the Government with regard to the lines upon which the coming legislation lieoessary in the bank's interests should proceed. In view of the discussion that is at present 'going on, consequent upon tho action taken by a section of the shareholders at tho recent general meeting, it is considered advisablo that the shareholders and the general public should be put in possession -of the board's proposals in tho matter. Th<> Government is in no sense comluifted to tho .scheme outlined 'in the memorandum. It is understood that they Imvo so far come to no decision in 1 Tegard to tho nature of tho pending legislation.

The Position Reviewed. "By Section 11 of. the Bank of New Zealand Act, 1903, the State-guaranteed stock, to be issued by the bank to the extent of one million sterling under .that Section, w,as made. redeemable," Btates the memorandum, "on or before July 19, 1914, and it is therefore expedient to givo early consideration to proposals for meeting this liability. .Although the bank would now have no difficulty in redeeming or otherwise providing for this stock without the guarantee or other aid of they State, it would obviously bo. better both for the bank and for the financial interests of the Dominion generally if a satisfactory basis for ft renewal of this' State guarantee could be arranged- with the Government. It is true that this would necessitate legislation authorising.; tho renewal, but that fact would afford .the bank an opportunity of obtaining from Parliament statutory power to increase its capital. "It is over nine years since the last Bank of Neiv.Zealand legislation was passed, and the strikingly Tapid and continuous expansion of tho bank's business during this pomo/1, has ma.de a 1 substantial increase in its capital.'essential to its wide and increasing sphere of usefulness to the business interests of Now Zealalid, as well as to its own profitable development. We are advised that the bank,oaniibt increase its capital without legislative'authority, and hence,: as. recourse to Parliament, is; immediately.necessary toobtain a renewal of the State's guarantee of* the stock I havo referred .to,: the occasion should be taken to secure the requisite statutory power for; the}' bank's , capital. The. necessity; for-this appeal to Parliament may be made use ot. as the-occasion for providing that, the State shall acquire a larger proprietary interest in the bank; and it is prudent in devising a basis for the proposed renewed guarantee and increase of capital to provide for this larger proprietary share on terms which will no.t be unjust'to the ordinary shareholders. • Three Interests Defined. "There are three interests which, while not necessarily separate or in conflict, must still "be separately weighed arid allowed for. These flro:—-

(1) The permMciit. interests;of the', institution.-' (2), The ;• 'interests .of -the present shareholders;'.'nnd ! .. ■ (3) The': interests of the State. _ _ "To see the nature and relationship of Jhese in proper focus, it is necessary to remember the stages by which tlio banks present position has been reached. Owing' to the onormons.losses the bank , has suffered in previous years. Parliament enacted in 1895 thab the. .whole. of.Jits ordinary share capital, ■one-third of tho shareholders' reserve-liability of .£lO, should be written-off aiid,;treated as cancelled; and^as.'.a;means,, of- providing the bank with:%6'rking' ! capital-: an issue of 150,000 01 . : :'per'vcent. ■" 'preferred stores was authorised. 'The shares were issued, to the Govternment at ;their nominal amount of ,£3.65. Bd. each,' and therefore produced <£500,000. authority was also given Jn: 1895't0 : . call up a further £5 6s. 8d; of the reserve liability on the ordinary; '.arid, .the proceeds were declared to be new working capital., There still Temain9 on. the ordinary shares an uncalled liability of .£3 6s. Bd. ; which, by the Act of 1903, was declared to be ordinary capital ,in the bank. Hence, th?, • present 1 ordinary shares .are 150,000 in number and M 13s. 4(1. eaoh in amount, on 'account of whioh ,£3 6s. Bd. (producing - i»00,000) has been paid up. and i 3 6s. Bd./remains liable to be called up at any time. "The 'preferred shares I have, referred /to, issued to the Crown under the Act of 1895, were repurchased by, the bank in October, ,1900, and subsequently 75,000 preference shares were issued to the Crown under the Act of 1903, of the nominal amount of ,£6 13s. Id. each. These shares were'fully paid-up, and gave the bank ,£500,000' as capital. They ranked for dividend' in priority To ordinary shares up to 5 per cent, and they were also entitled, to one-half per cent, for every 1 per; cent. ovor. 5 per cent, paul • on the ordinary shares; but in no event was the dividend payablo on them to exceed 10 per cent.;, Bank's Present Capital. "In 1901, the bank .paid off 'half 'of tho ',£2,000,000 of stock which the State had guaranteed under the Act of 11894, and issued the fresh guaranteed stock (which I have already referred to) for the remaining ifil,ooo,ooo. Hence, the capital of the bank at present is as follows:Stock guaranteed by the State 1,000,000 State-owned' preference shares,.' ; 75,000 (=B6 13s. 4d. each, fully paid-up) 500,000 Ordinary shares— . . , 150;000 of .£6 13s. 4d. each, of which £3 6s. Bd. has been called.' . Paid-up 500,000 Uncalled, .£500,000 Total paid up 2,000,000 Add the amount to the reserve fund. 1.-00,000 Total of working capital 3,200,000 "This amount is inadequate for the now very extensive and rapidly-expandine business of the bank, and safe and profitable use could bo made of additional capital. Before, however, submitting proposals for raising this extra capital, it is well to revert to t.lm triple interests already referred to. Of, these, it seems to me the permanent interests ot the bank, as tho largest financial institution In the Dominion, are paramount, and ' hence, the method of raising the requisite new capital should he the best that "an be arranged in the interests of the institution itself. In other words, these should not be subordinated to the grant of anv special advantages to either the. present ordinary shareholders or the Crown. Anv advantages arising from the raisin" or. iw of the new capital should reach the .shareholders and the .Crown throiHi the promotion of the interests oi the institution, and not at its expense. But this rule observed, no one will deny that the . ordinary shareholders deserve every consideration. Many of them have in tiie past .suffered, great,losses through the bank— having had the whole of tho ordinary'capital, and part-of what they contributed of the reserve liability, wiped out Dividends are now paid by the bank on 6s. Bd. per share, while, assuming ordinary shareholders paid originally merely the nominal amount of the share (and most of them paid a large premium . they have now .contributed JIIG 13a. 4d. on each 9hare.' • "I know the3e considerations are complicated by the. fact that, a large number of tho present shareholders acquired their interests since the disasters overtook the bank, at a very low price. There still remains, however, > considorflblc bodyot the original shareholders who havo courageously suffered their losses, paid their calls, and stuck loyally to - the institution; and these holders deserve any favourable treatment which la insistent with tho paramount interests of tho institution. On tho other hand no one can reasonably deny tho State s « r ; vices to tho bank in its great crisis, nor the splendid stability the State's nart.cination as guarantor and shareholder has Ln to the institution. lo this assistance,' it must be conceded, much of the ' phenomenal growth and prosperity of the I ink is due; and this assistance must bo regarded in devising a basis for the State's takini! a- uv DroDosed proprietary

interest in tho institution. It must, however, in this connection be remembered that the bank is still a private institution, although under a measuro of Government supervision; and its shareholders are entitled to I>e dealt with by the State on the samo basis of legal rights and fair play ns other pnvato ' propertyholders. 1 Methods of Raising Capital. ■ "The question then is: What method of raising tho further capital now required will do justice to tho various interests of the bank, the shareholders, and the State? I think the following proposals and observations should meet with the approval of those representing these interests:— "1. The Stnte's guarantee of tho one million pounds stock maturing in July, 1911, to be renewed for 20 years, on condition that the bank establish a sinking fund, sufficient to pay oil tho J21.000.000 at maturity. 1 ■ "2. Existing preference shares held by tho Crown (75,000 of J!G 13s. Id. each, fully paid), to bo styled 'A' preference shares, and a now class of share to be croatal, to be styled 'B' preference shares, tho 'B' preference shares to be shares of £6 13s. 4il. each, fully paid up; to be subject to no liability, whether in the event of the winding up of the bank or otherwise, and to confer no voting power; to rank, as regards capital, after the 'A' preference shares, but in priority to tho ordinary shares, and as regards dividends to be on the same footing as ordinary shares, and receive, on all ocoasions of divided payments, the samo rate of dividend as the ordinary shares. Legislative authority would be given the bank to issue fresh capital as follows: —.£1,000,000 in 150,000 'B' preference shares of .£G 13s. Id. per share; .£2,000,000 in 300,000 ordinary shares of -EG 13s. id. per share; total, .£3,000.000. The new ordinaiy shares would be shares-of -£G 13s. 4d. each, fully paid up, and to be subject to no liability, whether in event'of the . winding up of the bank or otherwise. .... "3. Authorised increases of capital to be made in such amounts, at such times, and on such terms and conditions as the board with the approval of the Minister for Finance may prescribe, but subject to the following provisos, which shall in the case of eatfh and every issue, apply:— (1) Each issue shall be made in the 1 -proportion of one "B" preference share to two new ordinary Bhares, . to be simultaneously offered for subscription; - (2) The terms of issue and.dates for payment of calls to be on each occasion the same for both "B" preference shares and new ordinary sbaras; (3) When an issue has been, decided upon, an option to be. given for the subscription of the whole or any portion of suoh' issue in the following : order of priority:— , In respect of "B".preference shares: .(a)-'To the Grown. '• • • '*. (b) To ordinary shareholders in proportion to the- paid-up capital on their then existing ordinary • .shareholdings. ... . (c) To the general public of Now ■ Zealand or elsewhere.

In respect of new ordinary shares: (d) To ordinary shareholders in proportion to the paid-up capital of their then existing ordinary sharp holdings. ■ (e) To the general public of New • Zealand or elsewhere. "The ratio of proprietary interest in. the bank as between ordinary shareholders and "the State will thus, if tlis first option in respect of 'B' preference shares should be availed of on each occasion of a fresh capital issue, bo preserved as at present, viz.—two-thirds to the former and one-third to the latter, provided always that the State should at all times have a controlling representation, on tlio. of the whole authorised increase, of capital, that is to say, 37,500 '-B' preference shares of 13s. 4d. each, .£250,000j and 75,000 ordinary shared'.of • i6'l3s. 4d., .£500,000, to be issued as soon as possible at a 'premium 0 f 50 per cent., i.e., a premium of JG3 to.; Bd. per share. The remainder at &uch time or .times and on such' terms and conditions as the board in consultation with the Minister for . Finance may subject always to the terms of the last preceding paragraph (paragraph-;3)j■' Th® : nary sihares to rank equally with tho existing ordinary shares for. tlie, purpose of voting.

. How the Capital Would Then Stand. • v."5. The capital of the bank would then .stand thus: — AUTHORISED CAPITAL. Four per cent, stock jfuaran- ' teed by the Crown <£1,000,000 "A" preference shares: 75,000 of ;66 13s. id. each fully-paid-up, itimed to the Crown un- ' dsr "The Bank of New Zealand Act, 1903" 500,000 "B" preference shares: 150,000. of -EG 135. id. each 1,000,000 Ordinary shares: 150,000 of £6 13s. id. each, paid up to ,£3 6s. 8d 500,000 Uncalled, .£3 6s. Sd 500,000 New issue ordinary shares: 300,000 of .£0 13s. id. 2,000,000 ,£5,500,000 SUBSCRIBED CAPITAL. Four per cent guaranteed stock .£1,000,000 "A" preference shares: 75,000 1 of .£6 13s. id 500,000 "B" preference shares: 37,500 of i.6 13s. id 250,000 Ordinary shares: 150,000 of .EG . 13s. id:. .£3 6s. Bd. called ... 500,000 ,£3 6s. Sd. uncalled, ,£500,000 New issue ' ordinarv shares: 75,000 of .£6 13s. id 1 500,000 Premium of .£3 Gs. Bd. per share ori 37,500 "B" pieferenoo shares and 75,000 new issue ordinary shares, to be transferred to reserve fund 375,000 Reserve fund as at March 31, 1913 1,375,000 500,000 Uncalled capital of .£3 6s. Bd. per share on 150,000 ordinary shares 500,000 ,£5,000,000 Balance of. authorised capital unissued:— 112,500 "B" preference shares of <£6 13s. id .£750,000 225,000- new issue ordinary shares of £6 13s. id 1,500,000 <£2,250,000 "6. In event of liquidation or of the winding-up of tho bank's "business, the proceeds of assets realised shall be applied as. follow:— First: In payment of moneys due to tho Crown in respect of liabilities or payments other than payments made -under Hue above-mentioned Ruaraaiee of tho .bank's <£1,000,000 stock. 1 Second: In payment or the satisfaction of the claims of all oflier creditors of tho bank. >• Third: In repayment of the guaranteed stock, ".£1,000,000. Fourth: In repayment to the Crown, or other holders, of tho amount of "A" preference shares, .£500,000. Fifthi: In repayment to the Crown, or other holders, of tho amount of "B" preference shares. Sixth: The residue of assets, after realisation, to be divided amonjj tho ordinarv shareholders in tho proportion which the paid-up capital represented by the holding of each proprietor bears to the total paid-up ordinary share capital of the bank.

"7. There is every reason to think that the new preference and ordinary shares would 1)0 readily taken up by tho Crown and existing ordinary shareholders nt the premium mentioned, since the prospective profits on them would provide a good return on the amount of the share and premium, and the earning power of tho bank justifies such a premium. The net profits of the bank for the five years muling March 31, 1912, after payment of guaranteed stock interest, amounted to no less than .£t,Go.t.9l2—or an average return per annum of J!.12A,782 ; and to future profits would'hnve to lie added interest on the premium paid for the new shares. Moreover, there is ample precedent for asking a premium in such eases. Quite recently the Bank of Australasia determined to increase its capital, and now shares were offered to existing proprietors at 150 per cent, premium; whilst, tho National Bank is now increasing iti resoiirces by an issue of new shares at 50 per cent, premium. "8. Payments of calls and premiums, to be made to suit the convenience of tho bank and the present holders of shares. I would suggest:—Deposit on application. 253. per share, and ebvmi . instalment* of .oer shaw at iutvtals .tares.,

months; eacli-payment to bo apportioned thus:— s. tl. 1G 8 per share to share capital account. 8 t per share to share premium, for credit of reservo fund. 25 0 "Shareholders would have tho Tight to prepay any or all of the instalments, on any of the dates fixed for instalment payments, and the capital aniouilts included in such pro-payments to rank for dividend as from tho date of pre-payment, provided the proportionate amount of share premium* as mentioned above bo simultaneously paid. £ "9. Tho present dividend and bonus on tho ordinary shaves at 15 per cent, per annum is 75,000 Dividend, on "A" shares held by . tho Crown 50,000 Total .£125,000 If tho same dividend and bonus (15 per cent.) were paid on the amount of the increased 1 capital proposed to be called . up (i.e., one-fourth -of i! 3,000,000), *£750,000, it would ' • ■bo. ..' 112,500 .£237,500

"Assuming, then, the average pro-fits of the last five years - were maintained, there would be an ample margin left after paying for interest and sinking fund ill connection with the guaranteed stock, and after paying dividend at the rates already stated on the existing and the new shares. Further, it is quite reasonable to anticipate a substantial increase in its profits when the bank is strengthened by the proposed npw capital. "10. It is expedient to obtain legislative authority now for raising all the additional capital the bank is likely to require from time to time for some years to come. This obviates repeated applications for statutory power to Parliament, and it will enable the bank to meet more promptly the financial needs of our rapidly expanding trade and. commerce. ■ ; "11. In view of this proposed largo increase in the number of shares in the bank, it will ha desirable, in order to give existing shareholders the opportunity of exercising their option of taking up the new shares, to extend the maximum number that can be held (3000 shaves) by any one shareholder, in proportion as the capital is increased. As the paid-up capital represented by shares hold by ordinary^shareholders is: proposed to be doubled by the first issue, the maximum number that can be held by any • shareholder should bo doubled; making- the number 0000 shares. I think this should be the maximum, and I would not, propose, to extend it on. future : issues. • _ . .

"12. It is also desirable to take into consideration'the question whether shareholders should not be fit libxrty to hold proxies to a greater-extent at general.meetings than is now permitted. Section 14 of the Act of 1898 should be amended, and the limitation at present imposed by Subsection. 2 of this Section (on. vote? exercisable by proxy should be extended from 250 to 2000 votes. 1 "13. Shareholders in general meeting having expressed tlio opinion .and desire that the remuneration of the directors should bo increased, power should be given under the new legislation to increase the remuneration accordingly. By Section 1of the Bank .of New Zealand and Banking Act Amendment Act, 1898, the,remuneration is fixed at .£2OOO, divisible as the directors may by resolution determine. In view of :tho prosperity and prospects oi the bank, and of the increasing responsibilities consequent, upon the growth that has taken pfaco in its business, this amount is inadequate. I would suggest that the statute should be amended, either by fixing a definite larger sum, or by cmpowering the shareholders to vote such higher remuneration as they, may desire to give provided the amount doesj not excfeil a certain fixed maximum. As regards the amount, it is not for mo to make-any suggestion. . _ , "Wellington, May 15, 1913.