To sell or to not sell – that’s the query that various governments have asked themselves since Kiwibank was established in 2002. Now it’s the turn of the present coalition led by the National Party. investigate the state ownership of the bank.
The ministers have asked the Kiwibank board exploring expansion opportunities for the bank, potentially including investment from private sector or government entities.
This got here just two years into the previous Labour government. 2.1 billion NZ dollars spent ensuring full control over Kiwibank and is part of the coalition’s efforts to extend public sector productivity, growth and efficiency.
The latest try and help the bank grow while retaining full New Zealand ownership must even be seen within the context of the recent Commerce Committee meeting draft report on banking services, wherein Kiwibank was identified as a market distorter.
If properly capitalized, the report says, Kiwibank should make New Zealand banking more competitive. Supporters (*4*)partial privatization or a public listing of some Kiwibank shares agree. They also argue that this is able to strengthen the stock market and funnel profits back to New Zealanders.
The government has not yet proposed anything specific. But any plans to partially privatise Kiwibank so soon after the state effectively rescued it deserve serious scrutiny. Such a move could do more harm than good, for 4 predominant reasons.
1. Bank concentration is normal
The traditional concentration of the banking sector in New Zealand and the dominance of the market by the 4 large banks headquartered in Australia are unlikely to vary any time soon.
But a concentrated banking sector is just not bad and even abnormal and exists in lots of countries. For example, three banks within the Netherlands currently they hold 84% of total banking assetsThe smallest, ABN AMRO, is larger than all New Zealand banks combined.
Still, the Dutch are less vocal in regards to the lack of competition and the high profit margins that include it. There is an acceptance, especially amongst EU banking regulators, that the choice of more small banks is just not a panacea.
Small banks in EU countries akin to Spain and the Netherlands have failed more often than large ones. What’s more, innovations in banking and finance come mainly from large banks.
Getty photos
2. Capital Investment and Growth
The notion that more capital will promote growth puts the cart before the horse. As fans of Shark Tank or Dragons’ Den investment shows know, only firms with a compelling value proposition attract funding.
Kiwibank’s track record leaves much to be desired. For example, the press release accompanying its 2023 results cited the launch of Apple Pay as a significant highlight. Other banks began offering the service in 2016.
Moreover, at 7.5%, the bank’s return on equity is the bottom among the many six largest banks. And its core capital ratio has not increased since 2018, making it harder to fulfill the Reserve Bank’s rising capital requirements.
Following a small capital injection of $225 million last yr, Kiwibank CEO Steve Jurkovich said the bank’s loan portfolio could increase significantly. According to the Reserve Bank financial strength panelHowever, Kiwibank’s net loans and advances grew by 2.7% and 1.8% within the quarters ending December 2023 and March 2024, respectively.
This was not significantly different from growth in previous quarters since 2018, which averaged 2.3%. In other words, Kiwibank’s own experience shows the issues within the equity-before-growth narrative.
3. Concealed foreign possession
In a really perfect world – with a deep and liquid capital market and a big, growing and productive economy – having a competitive bank that’s 100% owned by New Zealand residents might work well.
In reality, New Zealand doesn’t have these features. In fact, Kiwibank’s ownership restrictions – which prevent it from being floated or sold directly – have resulted within the previous owners transferring their shares to the federal government.
Partial privatization would due to this fact require selling shares at a big discount. And as sale of Kiwi Wealth to Fisher Funds in 2022 suggests that it could ultimately be financed by foreign private capital.
This could be achieved through a leveraged buyout, where an overseas private equity firm lends large sums of money to, for instance, a KiwiSaver fund to purchase shares. Technically, the KiwiSaver fund could be a 100% New Zealand company that owns shares in Kiwibank. However, this ownership could be largely formal.
The New Zealand owner would pay a high rate of interest to the private equity firm. And it is probably going that the private equity firm would wish to break up Kiwibank to scale back costs and improve efficiency.
By comparison, the present setup – 4 dominant banks owned by parent banks in a geographically and culturally close country – is just not that bad.
4. Unintended consequences
Finally, there may be the problem of popularity and moral hazard. Investors could be skeptical if Kiwibank were partially privatized, as history shows that its ownership appears to be depending on the present government.
Given the uncertainty, investors may buy stocks which might be trading at a deep discount or if the stock offers a high yield – which is strictly what private equity firms require.
In turn, that could lead the bank to tackle an excessive amount of risk, which creates disruption that nobody wants. Buyers might also desire a guarantee that they’ll return the shares to the federal government if the bank doesn’t do well.
Rather than rush into partial privatisation, Kiwibank should deal with strengthening its capital base, improving its performance and establishing a transparent track record of growth and innovation.
Only then should any change of ownership be considered. The path to a more competitive banking sector in New Zealand requires patience, strategic planning and a sensible assessment of market conditions, not hasty structural changes.
