Kiwibank may raise money to bolster its capital position to meet potential new Reserve Bank capital requirements

By Gareth Vaughan

Kiwibank may look to raise money to "supplement" its capital position to cover any additional capital requirements placed on banks by the Reserve Bank, a Kiwibank spokesman told interest.co.nz.

His comments come after Fairfax reported that the Government had sent a strong message to NZ Post, Kiwibank's parent, that it's not prepared to put more money into Kiwibank anytime soon. The Fairfax story was sourced from a letter to Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall from NZ Post chairman Michael Cullen.

The article also said that Kiwibank had adopted a new business plan in February that wouldn't require any short-term taxpayer funding. To achieve this Kiwibank had "tempered" its expected growth, especially in business banking Fairfax reported, and had also pushed out the date by which it would achieve the level of Tier 1 capital needed to meet Reserve Bank criteria.

However, the Kiwibank spokesman said the bank meets Tier 1 capital requirements under the Reserve Bank's Basel III capital adequacy requirements.

"The only uncertainty relating to capital requirements are any additional changes the Reserve Bank imposes (e.g. macro-prudential tools)," the spokesman said. "Kiwibank continues to run appropriate internal capital buffers to proactively manage any potential changes."

The Reserve Bank says it's considering four macro-prudential tools that could be used to lessen risk in the financial system. The four, which would only apply to registered banks and wouldn't affect existing loan agreements, are:

• the countercyclical capital buffer, effectively banks holding more capital during credit booms;
• adjustments to the minimum core funding ratio, altering the amount of retail funds and longer-term wholesale funding banks have to hold;
• sectoral capital requirements, or increasing bank capital in response to sector-specific risks;
• restrictions on high loan to value ratio residential mortgage lending, which, for example, could mean borrowers having to have at least 15% or 20% equity.

Finance Minister Bill English said in February he expected to sign a deal with Reserve Bank Governor Graeme Wheeler by the middle of the year on the macro-prudential tools.

Kiwibank capital 'exceeds regulatory minimums'

The Fairfax article also said Kiwibank could "rejig its current mix of securities" in a way that wouldn't see its credit rating cut, or increase its cost of capital. In response to this, the spokesman said that subject to ongoing capital "consumption", Kiwibank might decide it’s appropriate to issue a Basel III Tier 1 compliant capital instrument (AT1) to supplement its capital structure and replace any legacy capital instruments that are no longer regarded as tier one capital.

"Kiwibank’s capital position exceeds regulatory minima and is expected to continue to do so. Rating agencies have not indicated that our current or forecasted capital position places any risk onto its existing credit rating or cost of borrowing," the Kiwibank spokesman said.

"The changes in the business plan have been relatively moderate. Kiwibank continuously adjusts its assumed balance sheet growth based on its strategy and external market dynamics. The specifics beyond that are commercially sensitive."

Interest.co.nz reported in February that Treasury had commissioned and received a report from investment bank Goldman Sachs on the future capital needs of Kiwibank, but said the report's contents were too commercially sensitive to disclose. The report is understood to be a comprehensive strategic review of both Kiwibank's business and business strategy.

In terms of credit ratings, Standard & Poor's downgraded its Kiwibank rating last October by one notch to A+, with a stable outlook, from AA- in a move that mirrored its downgrade of NZ Post. S&P's Kiwibank rating is a notch below the AA- rating the credit rating agency has the big four banks - ANZ, ASB, BNZ and Westpac - on. Fitch Ratings has Kiwibank at AA, one notch higher than the AA- ratings it has on the big four banks, and Moody's Investors Service has Kiwibank alongside the big four at Aa3.

As of December 31 Kiwibank's tier one capital ratio (which represents shareholder's funds in the bank), expressed as a percentage of total risk weighted exposures, was 10.6%. Its total capital ratio was 13.5%. The Reserve Bank mandated minimums are 6% and 8%, respectively.

In 2010 the Government put in place what it termed an uncalled capital facility of NZ$300 million that NZ Post can call on in an emergency to help maintain its credit rating and Kiwibank's growth. No money has been drawn down on this thus far.

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