Part-privatising Kiwibank is back on the Government’s agenda, as it considers how the bank can grow long-term without its help
The Government says it isn't in a position to support Kiwibank's growth, as it faces 'significant fiscal constraints'.
The Government is once again considering how it can facilitate Kiwibank’s growth without it pumping more capital into the state-owned bank itself.
In a letter of expectation to Kiwibank’s owner, Kiwi Group Capital (KGC), Minister for State Owned Enterprises Simeon Brown directed KGC to “work on alternative growth scenarios for Kiwibank”.
He said, in the March 25 letter, that KGC should engage with Treasury and detail how much capital would be required for different scenarios and how this would influence the Crown.
The Reserve Bank’s December decision to not tighten its bank capital requirements by as much as previously planned has freed up a lot of capital Kiwibank can use to grow.
However, if the Government wants Kiwibank to play a greater role in challenging the big four Australian-owned banks longer-term, it will need to inject capital into the bank itself, or allow it to raise capital from the private sector.
Brown and Finance Minister Nicola Willis, in a February 18 Cabinet paper, explained: “The Crown could continue to be the sole provider, or be one of the contributors, of additional capital. However, this would see Crown funding directed to Kiwibank and away from other priorities.
“Given the significant fiscal constraints we are facing, the Crown is not in a position to support this course of action.”
Both Brown and Willis declined to detail to the Herald the sorts of pathways they saw for Kiwibank’s growth in the future. Large portions of their Cabinet paper, a Cabinet minute and the letter of expectation were also redacted.
However, listing Kiwibank on the NZX remains a very real possibility, should Brown and Willis receive a mandate to do so at the November election.
In his letter to KGC, Brown said: “The Government has previously agreed to step towards providing KGC with a reliable channel to regularly access new capital over the longer term through a public listing, but that any initial public offering will not occur without an electoral mandate.”
Brown acknowledged “if Kiwibank is to significantly increase its relative growth … the bank will need to know in advance that it has assured ongoing access to capital markets”.
Growing Kiwibank has been a hot topic in recent years, as politicians have sought to improve competition in the banking sector.
Last year, KGC and Treasury talked to KiwiSaver fund managers, iwi and other large domestic investors about the prospect of them injecting up to $500 million of capital into Kiwibank. This would have diluted the Crown’s ownership of the bank.
The Herald understands potential investors didn’t like the fact that under the proposal, if they wanted to sell their shares in Kiwibank, they’d have to sell them to the Government. The concern was, they might not have had much power to negotiate a good deal.
It was also difficult for KGC to promise investors they would be paid solid dividends in the near-term, as Kiwibank sought to grow.
And, there was uncertainty around whether Kiwibank would eventually be listed on the NZX.
Ultimately, the Reserve Bank’s decision to loosen its capital requirements gave the Government and KGC reason to ditch their capital raise plans.
The rule change was akin to Kiwibank raising $500m of capital.
KGC estimated it would allow the bank to do an additional $20.7 billion of retail lending or $7.4b of business lending.
Coupled with a $400m capital raise Kiwibank did on the NZX Debt Market, it concluded it didn’t need any more capital in the near-term to achieve the lending growth in its current business plan.
KGC has been mindful of ensuring Kiwibank has sufficient capital to grow sustainably.
While it has been increasing its market share, growing too fast could require it to take on too much risk, by scooping up customers who can’t get loans from other banks, for example.
While Kiwibank can compete on service, there are also limits on the extent to which it can compete on price, while remaining profitable.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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