Treasury has advised cabinet ministers the Government could boost Kiwibank's capital either by issuing debt securities, sourcing new capital from third parties, or via a share market initial public offering (IPO).
These options are set out in a Treasury paper dated July 31 for Finance Minister Nicola Willis, State Owned Enterprises Minister Paul Goldsmith, and Associate Finance Minister Shane Jones. Treasury released a redacted version of the paper, Kiwibank Competitiveness Considerations, under the Official Information Act.
The paper came after the release of the draft report from the Commerce Commission market study into personal banking services, but before the August 20 final report. However, both reports recommended the Government, as Kiwibank's owner, look at how to provide the bank with more capital to better enable it to compete with the big four banks, ANZ, ASB, BNZ and Westpac.
The three options canvassed in the July 31 report, for the Government injecting capital into Kiwibank, are obvious ones.
The first is; "issuing additional government debt securities in the market lifting net core Crown debt, and/or displacing other Crown-funded priority policies."
The second is; "sourcing capital from third party professional investors, including Crown Financial Institutions."
"Growth capital could be sourced from third parties, including the investable funds of Crown Financial Institutions. This would mean the central Crown would share the business risk, of a larger bank, with those other parties and would also share the earnings – and if the other parties are non-Crown entities this would be recognised as minority interests in the Crown’s consolidated financial statements."
"So long as profitability is similar to, or better than, that prior to any capital raisings, the impact on Operating Balance before Gains and Losses (OBEGAL) should be neutral to positive. There would be no impact on the Crown’s net core Crown debt as the Crown would not be raising any additional government debt (Kiwibank’s borrowings are not included in that calculation)," Treasury says.
And thirdly, an IPO.
"For a bank which has New Zealand ownership as its point of difference, the natural progression for Kiwibank in raising capital in the medium term is through an IPO. This would offer a broader ownership directly than would private capital raising and would remove some of the challenges that arise for illiquid investments (higher return on investment required by investors, greater involvement in governance, more complicated exit provisions etc)."
Kiwibank CEO Steve Jurkovich told interest.co.nz last year a partial government sell-down via an IPO; "wouldn't be that much of a hurdle for us." However, Jurkovich said a requirement for Kiwibank to pay a sizeable dividend would be a significant change for the bank, if it was made. That's because retained earnings are Kiwibank's key means of increasing its regulatory capital.
Treasury points out as long as the Crown directly or indirectly retains a shareholding sufficient for it to be considered the controlling shareholder, Kiwibank would continue to be fully consolidated into the Crown’s financial statements.
"A non-controlling shareholding would need to be accounted for using the equity method, sometimes referred to as 'one-line consolidation.' This would be a more complex set of changes but as it appears unlikely to arise in the foreseeable future, we do not dwell on it further in this report," says Treasury.
Treasury also notes introducing any third-party shareholders into Kiwibank or its parent company Kiwi Group Capital, or if an IPO is considered, the collective arrangements will require Reserve Bank approval. Additionally Treasury says there'll be "some important considerations" relating to governance to be worked through.
"Kiwibank is now well progressed with a bank-wide transformation programme to improve business systems including a new cloud-based core banking system...If completed successfully, this will provide the platform for more cost-effective growth as scale increases. Since 2017, Kiwibank has sought to grow its market share in both the retail and business markets, particularly small-to medium sized enterprises (SMEs), with the latter targets for substantial growth from a relatively small base," Treasury says.
The Commerce Commission says in the short-term, capitalising Kiwibank; "appears to have the greatest potential to constrain the major banks and disrupt a market that is otherwise stable due to lack of competition."
After the release of the final Commission report Willis said Treasury was working with Kiwi Group Capital to provide advice before the end of 2024 on options for raising new capital, including from KiwiSaver funds, New Zealand investment funds and investment from regular New Zealanders.
Treasury notes since its 2002 launch Kiwibank has gained market share, rising from 2.4% of loans and advances to retail customers and businesses, excluding the agricultural sector, in June 2008 to 6.47% this year.
"At 6.47% of overall lending, Kiwibank’s market share is still well below that for the four major banks. Since March 2011, Kiwibank may have increased its market share by around 50%, but for the overall marketplace that is a relatively small change."
Treasury's paper notes Willis sought advice on ways Kiwibank can contribute to increased competitiveness in the businesses in which it operates being home lending, personal banking services and business banking. It also says once the ministers have made decisions in relation to the matters raised in the report, Treasury will engage with Kiwi Group Capital and Kiwibank.
At the National Party conference on August 3, Willis said it was time to look for outside capital for Kiwibank.
39 Comments
Only the first option, "issuing additional government debt securities in the market lifting net core Crown debt, and/or displacing other Crown-funded priority policies", will be acceptable to those who want KiwiBank to remain a fully state-owned bank in opposition to all other banks.
The second and third options both run up against the flaw we face with electricity gentailers: their duty is to maximise profit for their shareholders, even when the non-state shareholders own less than 50% of the company.
@JohnTrz - "will be acceptable to those who want KiwiBank to remain a fully state-owned bank in opposition to all other banks."
Personally I'm less concerned where a bank seeks its capital, whether it's NZ or overseas, & more concerned where I raise mine. It's just business at the end of the day. If a NZ owned & operated business cannot give me the best deal or get me over the line with funding & pre approval, then it's a simple no brainer, I'm going to go to the next competitive company that can. If thag happens to be an overseas funded bank then so be it.
We have this problem with most businesses, when looking to buy or use their services, it's generally more.expensove to use a local NZ business or NZ product or service than to use off shore. In a cost of living crisis I doubt many actually care where these big corporate companies seek their funding from, everybody is too worried protecting their bottom line & their wallets. If NZ businesses cannot keep up with the compitition, then it makes no financial sense to a consumer to continue to use their services or buy their products simpky just to keep them afloat because they ate NZ owned & operated.
If a NZ bank cannot approve my lending, I will go to an overseas competitive bank who will. It's nothing personal, it's simply just business.
There's an element of cutting off nose to spite ones face. It reminds me of the people who grizzle and complain about the higher prices in the small dairy at a remoter holiday spot, overlooking the fact that with a short walk, they can actually buy what they need and avoid driving 50+km to a supermarket in a town.
On the other hand, people who invest in KiwiSaver presumably want the best return possible. That surely means investing with a fund manager who is not required for political reasons to invest in New Zealand enterprises, whether those enterprises be a bank or other state-owned institution, or build-to-rent-housing, or roads, dams, wind farms, sewerage, water supplies, or anything else ... unless that's what's promising the biggest bang for the bucks.
For heaven's sake. Do we capitalise kiwibank by the cheapest possible method that reduces the flow of dividends offshore and helps us out with a spiraling current account deficit? Or, do we create yet another way that offshore investors can feed greedily from our housing ponzi, debt-fueled economy? Gee, I don't know. Maybe offshore investors need a bit more of us?
Willis said it was time to look for outside capital for Kiwibank
Normally I don't have much time for the worst xyz in living memory comments, but credit where credit is due, she is trying hard.
@ Jfoe - "Or, do we create yet another way that offshore investors can feed greedily from our housing ponzi, debt-fueled economy?"
There shouldn't be many offshore investors in NZ purchasing property since:
New Zealand citizens and permanent residents of New Zealand who meet the requirements to be ‘ordinarily resident’ can buy property without restrictions.
Overseas people usually cannot buy a house or land in New Zealand.
If you have a residence class visa but you are not yet ‘ordinarily resident’, you can buy or build one home to live in as long as you get consent from the Overseas Investment Office before you buy.
People who are not eligible to buy property:
You cannot buy or build a home in New Zealand if you are:
an overseas person with a temporary, limited, interim or transit visa (such as a student, work or visitor visa)
an overseas person without any visa.
If you aren’t sure if you can buy property, Immigration New Zealand has a tool to help you check.
https://www.linz.govt.nz/guidance/overseas-investment/buying-residentia….
The Labor government put the controversial buyer ban in place in 2018, claiming that overseas buyers had made home prices unaffordable for locals. The law—still in effect today—prohibits non-resident foreigners, with the exception of Australian and Singaporean nationals, from purchasing existing homes in New Zealand.
About one of the only good things that Labor actually did do during their 6 years governing. The idea that all these overseas investors are swooping in in droves & buying up hoardes of NZ properties away from local residence is nothing more than ficticious & uneducated. This ban has been in place since.2018, & still in effect today.
Your information is 6 years out of date Jfoe, keep up. Glad to have been informative for you, you can stop the mass panic hysteria of alp these overseas cashed up billionaires coming for your cities real estate. Relax. Breath. It's all okay. It's all taken care of. Aunty Ardern already sorted it for you.
@ Meh - Landlords feeding off tenants? Think you meant the other way round bud. Who's house does who live in again? Thats right, the tenant lives off the landlords property, for without it they would go homeless.
A parasite feeds off its host, just as a landlord hosts a tenant in a house the tenant doesn't own. If any feeding is going on, it's thanks to landlords that tenants have roofs over their heads. For if it were solely up to each individual, tenants would clearly fall flat with an inability to do what's required to own. That ain't on the landlord, it's not your landlords job to financially assist a tenant into a home, that's each individuals job. Fail to do so, & one will pay a high price for life for someone else to do it for them. The fact that one just does not like the business entity is irrelevant. Facts over feelings.
Also, Debt is money Meh. It's been this way since 1971, when Nixon removed the gold standard. Money is now not backed by anything tangible, such as gold, money is now debt, it's been this way for over 50 years now, I'm surprised that you didn't know this already?
It is interesting that although debt & taxes help make the poor poorer, both debt & taxes also help make the rich richer. Therefore, the secret to a prosperous life is not about save save save ones heard earnt after taxed dollars, but minimizing, not avoiding, ones tax burden where possible, & using effective debt to help create wealth. You are over 50 years too late if you are hoping to get wealthy using only after taxed dollars & no debt.
As for housing being "a ponzi scheme", you would have to clarify what you mean. Too many people trained to parrot political buzzwords without understanding what they mean & what they say. A ponzi is an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks. Now, to assume that housing is a ponzi, you would have to assume that everyone that owns a property, whether it be one or many, would have to be all in on it. That would be about half the country as owners currently in on it, with a good portion of the other half as tenants who wish to get in on it. So we have a scheme that most people are wanting to be a part of, & yet you somehow think thisnis a ponzi? You'll have to explain a little better than buzzwords.
Nice job using that many words to make a fool of yourself.
See if you can work out how high levels of private debt (and moderate govt debt) + offshore ownership of bank equity + a chunky current account deficit = an ever increasing amount of our financial assets being owned offshore.
@ Jfoe - Your financial assets may be owned offshore, but I own mine. Quite frankly it is not of concern to me where I obtain the finances, whether offshore or locally, as a business decision it comes down to purely who has the best deal, who can come to the party and lend. If the best lender for the job is offshore, so be it.
Its irrelevant how much private debt is locally lent vs offshore lent. What matters is total lent. I doubt you buy only local products and services, in so contributing to offshore financiers as well.
Maybe don't weigh in, nor ridicule others, until you have a base understanding of the macro picture.
I'll help you out because I am endlessly generous...
A country that runs a continual current account deficit (like NZ) has to by accounting certainty increase domestic private and / or govt debt. That's how we 'pay for' our current account deficit. So, in NZ, our housing ponzi scheme drags people into debt, and that debt creates surplus money in the economy, which gets transferred into offshore ownership when we run a current account deficit. If we were running a current account deficit without going deeper into debt domestically, then we would have to reduce our onshore savings to pay for that deficit.
Now take a looksy at our current account deficit. Can you see what is dragging it down? Is it the goods or services we buy? No, not really. It is 'primary income' - basically the dividends and returns we pay offshore investors on the financial assets (shares, equity, govt bonds) that offshore investors have amassed as a result of us running current account deficits for many years. A big chunk of this flow of $ offshore is to the bank equity owners (about $7bn a year in fact).
Now can you see how shoveling more NZ dollar dividends at offshore investors is like rolling a snowball down a hill? What do investors do with the NZ dollars they receive (directly or indirectly)? They buy more NZ financial assets - shares, equity, Govt bonds etc. So, we pay more offshore etc etc.
So, in my original comment, which you woefully misunderstood, I talked about capitalising kiwibank using Govt equity rather than selling shares to (mainly) offshore investors. Why? to reduce the flow of money to offshore investors. Nothing to do with selling houses to people with Chinese sounding names or whatever the hell you started rambling on about.
Its farcical that we must pretend that Kiwi bank lacks funding or the ability to be a market leader in NZ... Easy fix offer significantly lower mortgage rates and watch the clients come running.... RE seems to be the bread and butter of the OZ banks, time to toast their bread.... free return flight to Sydney with every mortgage....lol
100 bps everytime...no matter what the Ozzies come up with ... the aim being to obliterate them from the NZ landscape.... Kiwibank....where ALL Kiwi's Bank.... Shut the Ozzies out for long enough and then reap the rewards....it will be too hard for them to re establish dominance .... the initial outlay will be huge...but in the long term the returns will be concrete for the Government .... Instead of shutting down Kiwibank branches...watch Ozzie banks shut up shop .... but lets pretend we need the OZZIES and watch them buy into and destroy anything that empowers Kiwibank... there can be no middle ground ...its all or nothing.....the Ozzies have been milking Billions from Kiwis for too long ...they would delight in the demise of Kiwibank.... How many politicians end up on the board of foreign banks....? Time Kiwibank made its move for domiNATION...lets play dirty and build the offset into the OCR because we are KIWI patriots.........lol
What would immediately happen is that the bank would be flooded with refinance applications, they might be able to refinance a few thousand per month which is a tiny proportion of all mortgages. The big four could just wait it out.
Scaling a bank is a very complex proposition that takes many years to achieve because there are numerous organisational factors that impede growth.
1st mortgages.
Then the buyer had to go looking 2nd, 3rd, and even 4th mortgages, at ever more punitive interest rates, to get up to the purchase price. Not a bad system - although it slowed everything down and required the purchaser to actually do some real thinking - and because purchasers got really focused on not over-buying, i.e. settling for a lower priced house because the 3rd and 4th mortgage interest rates really bit hard.
22 years wasted since Kiwibank was created. How were they ever going to disrupt the current banking oligopoly without the necessary investment. Government banking should have moved to Kiwibank at the outset.
Where's the 4th option - the Superfund, ACC etc?
An IPO is pointless unless there's restrictions/regulations around dividends, share sales etc. Offshore capital will just demand higher returns defeating the purpose of having a Kiwibank.
The disruption required is to go against mainstream finance/corporate capitalism. The pendulum swung too far with neoliberal economics and the deregulation of the banking/finance system. The institutions have too much power and the resistance to any pushback is evident.
It is a business established specifically to be a 100% state bank.
Kiwibank is now well progressed with a bank-wide transformation programme to improve business systems including a new cloud-based core banking system...If completed successfully, this will provide the platform for more cost-effective growth as scale increases.
Technology does not drive business, it's not an advantage.
Hopefully someone a little bit more creative than your average banker provides input.
Could be a great opportunity to have a NZ bank reward NZ investors and borrowers in a unique way.
Allow kiwibank equity holders to use their equity as security against their mortgage, maybe with preferential rates. Have people build up equity in the bank in preparation for buying a home rather than withdrawing all their kiwisaver funds.
There are a number of rules that could be relaxed for equity holders, LTV ratios, low equity interest rates. This would add value to the borrower in a way that doesn't impact the financial performance of the bank.
This may reduce the return on equity expected vs Aussie banks, providing kiwibank with a competitive advantage.
A scenario where a prospective FHB saves 5% of the value of a property, buys kiwibank equity, or maybe bonds, with those funds and is able to borrow 100% of the purchase price. The interest on the 5% value is offset by the ROI from the equity or bonds because the expected return from those is higher than mortgage rates.
Seems like everyone is a winner.
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