New Reserve Bank rules make NZ owned financial institutions less competitive - Sam Knowles

Kiwibank’s departing CEO Sam Knowles says, thanks to new Reserve Bank rules, New Zealand owned financial institutions can now only compete with foreign owned rivals by going offshore to source funding and this makes them riskier entities.

(Update corrects reference to term deposits to retail deposits).

Announcing Kiwibank’s 13% fall in June year profit after tax to NZ$45.8 million yesterday, Knowles said the drop was almost entirely driven by increased funding costs with net interest income down 18% to NZ$133.39 million.

The Reserve Bank’s introduction of the core funding ratio (CFR) and difficulties rival Australian owned banks have faced tapping international wholesale funding markets for term debt, due to the European sovereign debt crisis and global financial crisis, had changed the funding landscape.

“So that means the Aussie banks have all come onshore and competed very, very strongly for the term deposit market which is our main funding source,” said Knowles, adding this had driven down Kiwibank’s margin on its interest.

The bank’s net interest to average total assets margin fell to 1.2% in the June year from 1.9% in the previous year.

Big drop in term deposit growth

Kiwibank said it grew term retail deposits over the June year by just 3% to NZ$6.91 billion compared to 39% growth in the previous year.

BNZ’s General Disclosure Statement for the nine months to June shows it secured NZ$277 million worth of new term deposit money during the three months to June, lifting its total term deposits to NZ$17.042 billion as of June 30. And in the March quarter Westpac led the way growing term deposits by a whopping NZ$866 million to NZ$17.13 billion.

All the major banks are targeting growth in term deposits following the introduction of the CFR on April 1.The CFR sets out that banks must source at least 65% of their funding from retail deposits and bonds with durations of at least one year. The central bank wants to increase the CFR to 75% by mid-2012 to offset New Zealand banks previous reliance on international wholesale, or 'hot' money, markets.

Knowles said this had “changed the balance” for New Zealand owned financial institutions like Kiwibank.

“They really can’t be competitive these days unless they go offshore because they need that (overseas funding) to get the average cost of funding down.”

Now agreement had been obtained for the government to supply an uncalled capital facility valued in the "low hundreds of millions" of dollars to cover emergencies and enable Kiwibank and parent NZ Post to maintain their AA- Standard & Poor’s credit ratings, Kiwibank would go overseas with cap in hand.

“Because if the Aussies come onshore and take our money, we’ve unfortunately got to go offshore to access some of the more global markets,” Knowles said.

Kiwibank had specific plans to open up a range of offshore funding facilities in the short-term. These were currently being finalized and would see the bank aim to raise a somewhere in the vicinity of the A$250 million raised in five-year bonds in Australia last year, Kiwibank’s first foray into offshore funding. Because the big Australian owned banks had “come onshore,” for Kiwibank to raise a significant chunk of money in a short timeframe to fund lending growth, it had to go to bigger overseas markets to reduce the average cost of its funding.

“It’s what we have to do as a consequence of what the Reserve Bank has done and the new rules it set up,” Knowles said.

And because the Reserve Bank had forced the Australian owned banks to improve their risk profile by boosting retail deposit funding, Kiwibank had to “slightly increase” its risk profile.

“Going offshore means you are exposed to different types of risk,” Knowles added. “Offshore (risk is) what people think of New Zealand. Onshore it’s what they think of you as a bank.”

 Kiwibank did manage to more than double its wholesale deposits to NZ$3.38 billion in the June year.

Covered bonds possible

And Knowles said Kiwibank, which raised NZ$150 million through a perpetual preference share issue in May, was now likely to tap New Zealand’s capital markets to fund growth annually.

“We’ll look at covered bonds long-term as well,” said Knowles. “We’ll look at all those things as would any prudent financial institution.”

Meanwhile, Brian Roche – CEO of Kiwibank’s parent NZ Post – said the process of replacing Knowles, who announced his departure in May, was well advanced. An announcement was likely within the next two to three weeks, Roche added.

After departing Kiwibank Knowles said he would take a break until Christmas. He wanted to work in growth companies, but hadn’t yet had time to research what he wanted to do properly.

“So I’ll take a break and work out what I’m going to do between now and Christmas.”

He said Kiwibank wouldn’t be signing up to the government’s extended retail deposit guarantee scheme which kicks in from October 12, when the initial scheme expires, and runs till December 31, 2011.

'New Zealanders don't save enough'

Knowles said banking had changed over the past 12 months to become “very much a funding game.” Previously, he said, if you could find assets you could always find easy funding for them.

All banks now had to be much more strategic about their funding. This involved accessing a wider variety of funding sources, especially from offshore sources given New Zealanders didn’t save enough money.

Knowles said Kiwibank, which recently launched KiwiSaver products, was very supportive of the current debate on making KiwiSaver compulsory.

“Banks in New Zealand take money from offshore and give it to New Zealanders,” said Knowles.

“That’s why we’re very strongly supportive of some sort of review looking at savings over the next 50 years. We need to be looking 20 years out and saying ‘how do we get away from being indebted to the world to get the New Zealand economy back on the growth path that we all want for our children’.”

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