At the weekend finance minister Nicola Willis told the National Party Conference she wants to look for external investors for Kiwibank to take on the big four Australian banks.
She says Kiwibank can’t become a disruptive competitor without extra capital. “And I am interested in exploring where that capital might come from.
“So, let’s have a look at what’s possible. It’s time to explore all the options.”
Her speech follows the Commerce Commission’s recent study into banking competition. It recommended injecting more capital into the bank as the best way to enhance competition in the short term.
The study says disruptive forces are needed to drive change. “No more cozy oligopoly. Instead, we need more mavericks.”
It also comes only two years after the previous Labour government brought Kiwibank entirely into state ownership for $2.1 billion.
Below market
Squirrel Mortgages, which places a chunk of mortgages through Kiwibank, says the New Zealand bank has already proved it can be competitive.
Chief executive David Cunningham says last year when banks were expanding margins on home loans, Kiwibank sat below market for a while. “At the time we commended Kiwibank for it.
“The problem was it ran out of capacity in terms of processing capability and so the bank stopped its below market activity simply because it got so much volume.”
He says that shows when a lender sits below market for a period of time, it can get substantial volume. The commission’s banking competition study observed no bank is really ever above or below market for long, with Kiwibank being the possible exception. “But even then it wasn't sort of that obvious. The insight is that if a bank is prepared to be price competitive there is substantial growth opportunity and Kiwibank demonstrated that.”
Fertile territory
Cunningham says Kiwibank has a “shed load” of customers – one in four New Zealanders. While its market share of mortgages at 7% is still low and not consequential these things grow gradually over time. “It feels to me like fertile territory.”
He says the bank is being run well and making good progress. “While it is not quite a maverick in the market, such as Macquarie, it is the only bank that comes close. Smaller banks, such as SBS and TSB just don’t have the capital.”
While the Australian banks have a low cost to income ratio and Kiwibank’s is higher, it is about scale and that can be grown, Cunningham says.
Kiwibank is only 20 years old, compared to the bigger banks' 100 to 200 years and it takes time to build scale, which is part of the competitive advantage the Australian banks have. “A bigger balance sheet for Kiwibank that is funded makes sense.
“If the government is going to back Kiwibank to become a disruptor it will be warmly supported by New Zealanders to invest money to provide equity for the bank to grow.”
It would be good for the brand, Cunningham says, with perhaps a ban on any foreign ownership, such as the golden share Telecom had years ago. “From a branding perspective it would be clever to keep it 100% New Zealand.”
Arguably it is a stepping stone to privatisation in a decade, but as seen with power companies, it works well with the government owning 50% and private New Zealand shareholders holding the rest, he says.
Cunningham doesn’t think anybody can look at today's return on equity for Kiwibank and say, ‘Well, why would anyone want to invest in that’? I think you go, ‘Well, what does the return on equity look like in five to ten years’ time once it's built some scalability’?
Serious risks
However, a banking academic told BusinessDesk Willis’ push to make Kiwibank a disruptive force is bordering on the “irresponsible”.
Victoria University of Wellington associate professor at the school of accounting and commercial law, Martien Lubberink said Willis’ approach potentially carries some serious risks from a financial stability point of view.
“Because what she is expecting is that a relatively small mid-size bank, which has barely sufficient capital and struggles to increase capital to meet the Reserve Bank’s requirements which are going up all the time, to become a disruptor and to address the issues of a lack of competition.”
Lubberink says the proposal is “irresponsible” because encouraging KiwiBank to become a disruptor will mean more risky lending.
