To sell, or not to sell – that is the question various governments have asked since Kiwibank was established in 2002. Now it’s the turn of the current National-led coalition to examine the bank’s state ownership.
Ministers have asked Kiwibank’s board to explore avenues for the bank’s expansion, potentially including private sector or Crown entity investment.
This comes just two years after the previous Labour government spent NZ$2.1 billion to secure complete ownership of Kiwibank, and is part of the coalition’s drive for productivity, growth and public sector efficiency.
The latest attempt to help the bank prosper while staying fully New Zealand-owned should also be seen in the context of the recent Commerce Commission draft report on banking services, which identifies Kiwibank as a market disruptor.
If properly capitalised, the report says, Kiwibank should make New Zealand banking more competitive. Supporters of partial privatisation or publicly listing a proportion of Kiwibank shares agree. They also argue it would boost the stock market and funnel profits back to New Zealanders.
The government has not proposed anything specific yet. But any plans to part-privatise Kiwibank so soon after the state effectively bailed it out deserve close scrutiny. Such a move could well do more harm than good, for four main reasons.
1. Banking concentration is normal
New Zealand’s historical banking concentration and the market domination of four large Australian-owned banks is not going to change any time soon.
But a concentrated banking sector is not at all bad, or even abnormal, and occurs in many countries. Three banks in the Netherlands, for example, currently own 84% of total banking assets. The smallest, ABN AMRO, is larger than all of New Zealand’s banks combined.
Despite this, the Dutch are less vocal about lack of competition and associated high profit margins. There is an acceptance, especially among European Union bank regulators, that the alternative of more small banks is not a panacea.
Small banks in EU countries such as Spain and the Netherlands have failed more often than large ones. Moreover, innovation in banking and finance comes mainly from large banks.
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2. Capital investment and growth
The notion that more capital will foster growth puts the cart before the horse. As fans of TV investment shows Shark Tank or Dragons’ Den will know, only firms with a compelling value proposition attract funding.
Kiwibank’s track record leaves something to be desired. For example, the press release accompanying its 2023 results listed the introduction of Apple Pay as an important highlight. Other banks began offering this service in 2016.
Furthermore, at 7.5%, the bank’s return on equity is the lowest of the largest six banks. And its core capital ratio has not increased since 2018, making it harder to meet increasing Reserve Bank capital requirements.
After a minor capital injection of $225 million last year, Kiwibank chief executive Steve Jurkovich said the bank’s loan book could significantly increase. According to the Reserve Bank’s financial strength dashboard, however, the value of Kiwibank’s net loans and advances grew by 2.7% and 1.8% respectively in the quarters ending December 2023 and March 2024.
That was not significantly different from growth in previous quarters going back to 2018, which averaged 2.3%. In other words, Kiwibank’s own experience shows flaws in the capital-before-growth narrative.
3. Foreign ownership by stealth
In an ideal world – with deep and liquid capital markets, and a large, growing and productive economy – having a 100% Kiwi-owned contender bank would work.
In reality, New Zealand lacks these features. In fact, Kiwibank’s ownership restrictions – which preclude floating or selling shares directly – have seen previous owners surrender their holdings to the government.
Part-privatisation would therefore require shares to be sold at a deep discount. And, as the sale of Kiwi Wealth to Fisher Funds in 2022 suggests, this may ultimately be financed by foreign private equity.
This could be achieved by way of a leveraged buyout, where a foreign private equity firm lends large sums of money to, say, a KiwiSaver fund to buy shares. Technically, the KiwiSaver fund would be the 100% New Zealand-owned firm holding the Kiwibank shares. But that ownership would be largely in name only.
The New Zealand owner would pay hefty interest expenses to the private equity firm. And it’s likely the private equity firm would want to tear Kiwibank apart to cut costs and improve efficiency.
By comparison, perhaps the current arrangement – four dominant banks owned by parent banks in a geographically and culturally close country – is not that bad.
4. Unintended consequences
Finally, there is the problem of reputation and moral hazard. Investors would be sceptical if Kiwibank were to be partly privatised, as history shows its ownership seems to depend on the government of the day.
Given that uncertainty, investors might only buy shares sold at a deep discount, or if the shares offered a high return – the kind private equity firms require.
In turn, this could prompt the bank to engage in excessive risk taking, which creates the kind of disruption no one wants. Buyers may also want a guarantee they can put the shares back to the government if the bank fails to perform well.
Rather than rush to part-privatise, Kiwibank should focus on strengthening its capital base, improving performance, and establishing a clear track record of growth and innovation.
Only then should any change in ownership be considered. The path to a more competitive banking sector in New Zealand requires patience, strategic planning and a realistic assessment of market conditions, not hasty structural changes.
*Martien Lubberink, Associate Professor of Accounting and Capital, Te Herenga Waka — Victoria University of Wellington
This article is republished from The Conversation under a Creative Commons license. Read the original article.
12 Comments
Last week's article probably has the answer:
"the Reserve Bank (RBNZ) potentially introducing a central bank digital currency (CBDC)"
No need for Kiwibank in its present guise, just a retail shell of a company that services the consumer aspects of the RBNZ CBDC, just as the other shells of ANZ, ASB etc will also do. (And we wonder why the retail banks are so against the idea! It must have merit if that's the case)
CBDC's may as well just be called "financial surveillance as a product". They should be offered but ONLY if simultaneously the absurd treatment of cryptocurrencies as being applicable for capital gains tax when used is changed.
This goes beyond exclusively financial concerns, look at how tools of financial surveillance are used in places like China. When the capability is there it will be abused.
Under Paul Brock the bank was very driven towards growth. Now that hasn't been as true subsequently but I would not write off an entire organisation just because it requires better management. Great businesses can survive eras of poor management and I have no reason to believe that the bank can't get back on track.
Their risk aversion since that project failed has likely cost them many times what the failure itself did. Their strength has never been their technology, allowing that failure to contaminated other areas of the business that had always been outperforming was a far worse mistake.
Cannot see anything wrong with having a State owned bank...maybe the problem is the govt chooses to do business with Aus banks ... nonetheless whatever happens happens... Some folk just cant help themselves when it comes to flogging off the silverware... Maybe we should just start using Australian dollars we seem to favor their banks. Im against selling out in case your wondering...lol
It is obvious that the foreign owned banks pumping ridiculous amounts of Kiwi money overseas every year can only do that if Kiwis let them. All Kiwis have to do is favour fellow Kiwis when doing business. Kiwis seem to prefer getting a bad deal off a foreigner than a good deal off a local. Postbank should never have been sold to ANZ. Getting it restarted with a new name was very witty. I suspect the Nats brief is to look after foreigners at the expense of locals, just as NZ First's job is to look after their nicotine addiction industry masters. Kiwibank will be sold yo one of the usual suspects, as the opposition to such sales will not be loud enough to stop the sale. We just have to switch to an NZ bank again, as I have done several times.
Kiwibank was set with a primary objective of providing competition with the 4 big banks (who wouldn't be so big in NZ and dominant with 85% oligopoly market share had the govt banned a number of mergers in the first place). The objective of being a NZ bank is secondary.
To meet this primary objective there is no need for Kiwibank to be publicly owned. It can and should be totally privatised. There is no need for govts to be in banking at all. We have enough other social and environmental crises govt funding should address.
However, what is needed is the strongest possible competition law that would effectively outlaw the existing big banks ever taking any shareholding in Kiwibank.
The Govt's long term aim should be to reach an unconcentrated market with 6 or 7 large banks each with roughly equal market share (14% to 17% each). At the moment we are far from that.
My partner banks with sparkasse in Germany, and they just increased their monthly account fee to 12 Euros per month and their eftpos transaction fee to 0.1 Euro cents per transaction. I'm flabbergasted because my online N26 pays miserable interest, but has zero transaction and monthly fees. I don't understand why Sparkasse isn't haemorrhaging clients? I fell sorry for the Sparkasse banks because they actually lend locally to productive start-up businesses rather than exclusively real estate.
I've had kiwibank since day one. My fees are, I think, zero. I'm super happy with them. The commerce commission executive summary says "Kiwibank imposes some constraint on the major banks but currently lacks the capital backing to consistently drive stronger competition in the market." Are they saying that more capital would somehow allow kiwibank to significantly undercut mortgage interest rates, thereby taking a bigger market share of loans? Is it a good idea to substantially increase the loan book right now? Is it possible that kiwibank is already functions optimally to deliver lower costs for kiwis?
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