By Gareth Vaughan
Treasury has commissioned and received a report from investment bank Goldman Sachs on the future capital needs of state owned Kiwibank but says the report's contents are too commercially sensitive to disclose.
The report is understood to be a comprehensive strategic review of both Kiwibank's business and business strategy.
A Treasury spokesman confirmed to interest.co.nz that the report had been both sought and received. However, he said its contents were "commercially sensitive" and he therefore couldn't discuss or provide them.
Having cut its teeth in the highly competitive residential mortgage market, over the past couple of years Kiwibank has expanded into the KiwiSaver market after buying Gareth Morgan Investments, into the small and medium sized enterprise (SME) market, and insurance market. The Goldman Sachs report is likely to have looked at opportunities for further growth and how these could be funded.
Alongside this expansion Kiwibank may require an expensive new core banking system.
Given New Zealand Post, Kiwibank's parent, is undergoing a major review as its traditional mail delivery business withers, and the National-led government is targeting returning the government books to surplus by 2014-15, funding required by Kiwibank will probably have to come from the public via either a sale of equity or debt, or a combination of both. One potential option might be selling a minority stake in Kiwibank via a sharemarket float.
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.
That's even though Standard & Poor's downgraded its Kiwibank credit 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.
Late last year Kiwibank raised NZ$150 million through a heavily oversubscribed offer of unsecured, subordinated bonds carrying a speculative, or "junk," grade credit rating which are paying investors' 5.80% interest per annum. During the year to December 31 the bank's total capital increased by NZ$156 million, or 19%, to NZ$980 million.
Kiwibank's tier one capital ratio (which represents shareholder's funds in the bank) expressed as a percentage of total risk weighted exposures, rose to 10.6% at December 31 from 10.1% at September 30. Its total capital ratio rose to 13.5% from 11.3%. The Reserve Bank mandated minimums are 6% and 8%, respectively.
Speaking yesterday after Kiwibank posted record interim profit of NZ$58 million the bank's CEO Paul Brock reiterated that Kiwibank wasn't yet generating enough profit internally to cover its ongoing capital needs. Brock said things were currently looking reasonably positive for Kiwibank in terms of capital raising options, citing a hybrid equity issue as one option.
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14 Comments
This is very bad news.
GS appears to be an organisation that keeps on getting into trouble
News item after news item charts the fines they pay in the US and Europe without admitting guilt. Many comentators suggest that to GS the fines have become a cost of doing business rather than a way in which governments moderate there behaviour. So why emply them?
The Dragon software* example suggests a very strong reason not to let them in the building.
They work for GS, they are paid by GS they do not work for Treasury, so why invite them in at all. It suggests are very bad end for Kiwibank.
* They were cleared but read a little of the case and ask yourself would you really want to be anywhere near these guys?
http://www.reuters.com/article/2013/01/23/us-goldman-dragon-trial-idUSB…
A Treasury spokesman confirmed to interest.co.nz that the report had been both sought and received. However, he said its contents were "commercially sensitive" and he therefore couldn't discuss or provide them.
How will taxpayers ever be able to exercise a coherent decision making process concerning Kiwibank's future when GS and the Treasury corner the information.
The citizens need to be financially isolated from any financial responsibility for Kiwibank and it's parent NZ Post whilst this supposedly important and no doubt expensive information is withheld. The SOE debacle known as Solid Energy is proof enough that those who think they are capable of being charged with the responsibility of running these concerns are undoubtedly failing to do so.
The other big 4 use deposits, some of thier own capital and borrowing on the short term money markets. The vast majority of funding for lending comes from borrowing in the money markets. KB has comparatively very little deposits, capital and other assets which in turn effects it's ability to borrow in the money markets as lending there works much like a personal loan, the more equity/assets you have the more lending you can secure and at better rates.
If KB want to keep growing and subsequently lending more they have to get a bit more creative, hence Goldmans advice. I wouldn't be surprised if Goldmans has recommend that Kiwibanks owners just print money, funding doesn't get cheaper than that.
Ratings from these people should come with a health warning in plain packaging, and with a picture of a diseased lung slaped on the front.
That's even though Standard & Poor's downgraded its Kiwibank credit 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.
I love reading all the shock and horror comments here and elsewhere re: goldman sachs; no other bank promotes so much irrational hatred! Let's not forget that it is the local bank doing the review, run by good kiwis. Goldman's is by far the best and technically competent advisory group in New Zealand. For something this big you want the best. Suck it monkeys.
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