Former owners NZ Post, the Accident Compensation Corporation and the New Zealand Superannuation Fund could be considered justified in wanting to get out. It was an ailing bank in the making.
The main capital ratio dropped from a healthy 13% in 2018 to 10.5% this June – the minimum level the Australian Prudential Regulation Authority requires banks to meet in order to be seen as unquestionably strong.
Return on equity lingered at around 6% per year, while the bank’s larger competitors offered a return twice as high. Added to this were the high capital requirements announced by the Reserve Bank in 2019 and which are now being phased in.
Too important to fail?
The government has promised to recapitalise the bank to help it grow. Whatever the bailout is called officially, it was the only realistic option. That said, the government cited several reasons for its decision to transfer control.
One was to keep the bank in New Zealand hands. The government has also pledged its full commitment to support Kiwibank to be a genuine competitor in the banking industry. And lastly, the transfer allows “all future profits to stay in the country – unlike the Australian-owned banks.”
But these justifications should not be taken at face value, and it is worth looking at them one by one.
Keeping profits in the country
The idea that keeping profits in the country automatically creates value for New Zealanders is by no means a given.
Kiwibank’s latest reported profits were $136 million, or $25 per New Zealander. This pales in comparison to the profits reported by the big four Australian-owned banks: in total, about $6 billion, or $1,200 per head of population.
Other banks either keep their profits or they pay them out to their owners and shareholders. In practice, these are institutional investors such as pension funds and insurance companies – some of them New Zealand-based.
Moreover, New Zealanders who own shares in Australian banks will receive dividends. Unlike the owner of Kiwibank, these Kiwi investors will benefit directly from their investments.
Lastly, it should be noted that banks have accumulated profits in New Zealand because of the increasing capital requirements. Since 2018, the four Australian-owned banks in New Zealand retained profits worth $12 billion. These would otherwise be transferred to their parents across the Tasman.
Again, these banks contribute to a stable financial system, keep profits in the country and do not need support.
Local ownership
In practice, all New Zealand banks are locally incorporated because of Reserve Bank requirements. Foreign-owned banks operate largely independently from their parents. This has led to inconveniences.
For example, ASB bank cannot freely use new technologies developed by its owner Commonwealth Bank, even though there would be efficiencies of scale if they were allowed to do so.
Also, creditors cannot hold a foreign parent bank liable when its New Zealand subsidiary fails. It’s therefore unlikely that foreign ownership would significantly change Kiwibank’s operations.
But the prospect of foreign ownership could add value. It could encourage its management to step up efforts to grow and compete.
Viability and competition
With a 5% market share, Kiwibank is small and lacks the critical mass required to thrive and compete effectively. Its small size is already problematic, as the bank cannot serve large clients. The government, for example, does not rely on Kiwibank for its banking.
The growth opportunities for Kiwibank are further limited because the New Zealand banking market is tightly regulated and conservative. European banks, for example, are much further ahead when it comes to the adoption of new technologies. Money transfers between European bank accounts are executed in real time, while such transfers still take hours in New Zealand.
The government claims that the banking market has become more competitive since the establishment of Kiwibank. According to Finance Minister Grant Robertson, Kiwibank continues to put pressure on the big four.
That may be so, but other small competitors would do that too. Rabobank, for example, is competitive in farm lending. Other small banks remain well-capitalised and don’t face the same challenges as Kiwibank.
The risks ahead
The most likely way forward for Kiwibank is to further increase lending to riskier clients. Robertson has already alluded to this, arguing Kiwibank could be a disruptor in the industry by focusing on small and medium-sized enterprises.
What are the risks now?
The problem is that Kiwibank needs the expertise to do this. Adding capital is not enough. And the government will want to avoid Kiwibank taking on too much risk because that will put the future of the bank itself at risk.
On top of this is the risk of Kiwibank’s owner wanting to meddle with its operations. While the present government promises to respect operational independence, who knows what a future government might do.
Finally, there is the question of moral hazard – setting a precedent for other banks. What if one of the other, smaller banks finds itself in trouble? Will the government step in? Again, the decision to save Kiwibank suggests the future could be uncertain indeed.
Return on equity lingered at around 6% per year, while the bank’s larger competitors offered a return twice as high. Added to this were the high capital requirements announced by the Reserve Bank in 2019 and which are now being phased in.
Too important to fail?
The government has promised to recapitalise the bank to help it grow. Whatever the bailout is called officially, it was the only realistic option. That said, the government cited several reasons for its decision to transfer control.
One was to keep the bank in New Zealand hands. The government has also pledged its full commitment to support Kiwibank to be a genuine competitor in the banking industry. And lastly, the transfer allows “all future profits to stay in the country – unlike the Australian-owned banks.”
But these justifications should not be taken at face value, and it is worth looking at them one by one.
Keeping profits in the country
The idea that keeping profits in the country automatically creates value for New Zealanders is by no means a given.
Kiwibank’s latest reported profits were $136 million, or $25 per New Zealander. This pales in comparison to the profits reported by the big four Australian-owned banks: in total, about $6 billion, or $1,200 per head of population.
Other banks either keep their profits or they pay them out to their owners and shareholders. In practice, these are institutional investors such as pension funds and insurance companies – some of them New Zealand-based.
Moreover, New Zealanders who own shares in Australian banks will receive dividends. Unlike the owner of Kiwibank, these Kiwi investors will benefit directly from their investments.
Lastly, it should be noted that banks have accumulated profits in New Zealand because of the increasing capital requirements. Since 2018, the four Australian-owned banks in New Zealand retained profits worth $12 billion. These would otherwise be transferred to their parents across the Tasman.
Again, these banks contribute to a stable financial system, keep profits in the country and do not need support.
Local ownership
In practice, all New Zealand banks are locally incorporated because of Reserve Bank requirements. Foreign-owned banks operate largely independently from their parents. This has led to inconveniences.
For example, ASB bank cannot freely use new technologies developed by its owner Commonwealth Bank, even though there would be efficiencies of scale if they were allowed to do so.
Also, creditors cannot hold a foreign parent bank liable when its New Zealand subsidiary fails. It’s therefore unlikely that foreign ownership would significantly change Kiwibank’s operations.
But the prospect of foreign ownership could add value. It could encourage its management to step up efforts to grow and compete.
Viability and competition
With a 5% market share, Kiwibank is small and lacks the critical mass required to thrive and compete effectively. Its small size is already problematic, as the bank cannot serve large clients. The government, for example, does not rely on Kiwibank for its banking.
The growth opportunities for Kiwibank are further limited because the New Zealand banking market is tightly regulated and conservative. European banks, for example, are much further ahead when it comes to the adoption of new technologies. Money transfers between European bank accounts are executed in real time, while such transfers still take hours in New Zealand.
The government claims that the banking market has become more competitive since the establishment of Kiwibank. According to Finance Minister Grant Robertson, Kiwibank continues to put pressure on the big four.
That may be so, but other small competitors would do that too. Rabobank, for example, is competitive in farm lending. Other small banks remain well-capitalised and don’t face the same challenges as Kiwibank.
The risks ahead
The most likely way forward for Kiwibank is to further increase lending to riskier clients. Robertson has already alluded to this, arguing Kiwibank could be a disruptor in the industry by focusing on small and medium-sized enterprises.
What are the risks now?
The problem is that Kiwibank needs the expertise to do this. Adding capital is not enough. And the government will want to avoid Kiwibank taking on too much risk because that will put the future of the bank itself at risk.
On top of this is the risk of Kiwibank’s owner wanting to meddle with its operations. While the present government promises to respect operational independence, who knows what a future government might do.
Finally, there is the question of moral hazard – setting a precedent for other banks. What if one of the other, smaller banks finds itself in trouble? Will the government step in? Again, the decision to save Kiwibank suggests the future could be uncertain indeed.
Dr Martien Lubberink is an Associate Professor in the School of Accounting and Commercial Law at Victoria University. He has worked the the central bank of the Netherlands. This article was first published HERE
5 comments:
A bailout yes but with a leaky bucket for sure.....
Sadly that bucket is supplied by the sucker taxpayer.
It does lead them to some form of credibility in their desire however to facilitate their central bank digital currency.
To kick Westpac off the Government banking ranch.
To drop the K to form Iwi Bank for a new Maori Banking system.
And finally tie it all together with some now redundent bailing twine under their horrid Digital Identity Systems Trust Framework Bill.....
As a mere citizen I am puzzled by the failure of Kiwibank. But at least in the the past their saver interest rates always seemed inferior.Do banks actually need private savers? It always seemed to me that if the banks went down the gurgler Kiwibank was the most likely to be propped by the govt. Are they saddled with too many small deposit ex Post office Saving Bank customers and their current equivalents? And are they too timid to shake them off? (There now being nowhere else). Are they insufficiently business like in rejecting poor borrowers?
So, another cycle in the life and death of a Govt Dept has come about.
Just like the BNZ, formed under false pretenses by some politician, badly run for decades by Govt, semi-privatised to get private capital then finally bailed out again for billions to be re-floated by Govt before being sold off overseas at a massive loss...
Time and time again, State banks, think big projects.. it's all to benefit some politician's ego.
Bigger is not better when it comes to customer service. Their reason for being should be customers ahead of profit. That has not been my experience dealing with ANZ and BNZ.
I would very much like to use Kiwibank but right from the start it has been run by bumbling Muppets doing the exact reverse of what it was intended to do. First bank to do away with cheques, first to abandon our local suburb, first to refuse to handle foreign exchange, poor term deposit rates, only bank I've ever heard of which doesn't offer compounding interest on a term deposit. The big four Aussie banks regard Kiwibank as a joke. In fact it's worse than that; the existence of Kiwibank allows the Aussie cartel to pretend that they are subject to competition when in fact there is none.
Brian
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