Kiwibank boost: Government attitude keeps foreign investors well clear for now – Jenée Tibshraeny

Finance Minister Nicola Willis wants to wait for Kiwibank's technology transformation to be complete in 2028 before possibly exploring an IPO. Photo / Mark Mitchell

THREE KEY FACTS

• The Commerce Commission, in August, recommended the Government increases Kiwibank’s access to capital.
• On Monday, the Government responded by directing Kiwibank’s parent company and the Treasury to talk to New Zealand investment institutions, professional investor groups, and KiwiSaver fund managers about potentially investing up to $500 million in the bank.
• The Government won’t make a call on whether to float Kiwibank on the stock exchange in this parliamentary term.

The Government is taking a cautious approach towards bolstering Kiwibank so it can better compete with the big four Australian-owned banks.

Its decision to gauge professional local investors’ interest in investing up to $500 million in Kiwibank will help the state-owned bank grow, but it won’t be a game-changer.

What it will do is remove the need for the Government to dig into its own pockets over the next few years to inject enough capital into Kiwibank to keep it ticking along, if not continuing to increase its market share.

The announcement also makes the Government look like it’s doing something to try to improve competition in the banking sector, without upsetting voters opposed to selling state-owned assets, especially to foreigners.

So, what would $500m of capital mean for Kiwibank?

Finance Minister Nicola Willis said it would support $10 billion of new home lending or $4b of new business lending.

To put these numbers in context, Kiwibank had $32b of loans and advances, including $27b of home loans, on issue at the end of June. So, $500m of capital could give Kiwibank a material boost.

But the bank would remain a relatively small player in the market. The $32b of loans it had on issue at the end of June only made up 5.7% of the market.

Why doesn’t the Government seek more than $500m from investors to really pump up Kiwibank?

It could be imprudent to try to get the bank to grow super aggressively.

Without being set up to lend to big businesses, do corporate deals, be the Government’s main bank or lend to farmers, rapid growth for Kiwibank could require it picking up mortgage and small-business customers other banks don’t want.

The bank is also part-way through a several-year-long technology transformation to improve what it already does (personal and small business banking), let alone do new types of banking.

So, $500m of capital seems like a workable figure.

Speaking to the Herald in August, Kiwibank chief executive Steve Jurkovich said the $225m of capital the bank received from its parent company in August 2023 (following its sale of Kiwi Wealth to Fisher Funds) had gone a long way and helped the bank grow its loan and deposit books by 9% over the year – a rate nearly three times that of the industry average.

Jurkovich said Kiwibank had enough capital for about five years, but if it kept growing at the rate it had, it might need a top-up in about three years’ time.

So, the Government was always going to have to inject more capital into Kiwibank, especially if it wanted it to take market share.

Getting this capital from the private sector is handy, especially at a time the weak economy is seeing the Government struggle to get the books back to surplus as quickly as it said it would.

This brings us to the next question, why limit talks to New Zealand KiwiSaver funds, investment institutions and professional investor groups, rather than welcome investment from anyone, including those offshore?

Willis said it would be better to consider an initial public offering (IPO) once Kiwibank’s tech transformation is done in 2028 and it could put a better proposition on the table for investors.

This might enable it to get a higher price for its shares.

On the flipside, the smaller group of local investors the Government is talking to might be able to negotiate lower share prices due to the uncertainty around whether a future government will do an IPO.

Willis’ proposition is that investors would be given the opportunity to sell their shares back to the Government if an IPO didn’t eventuate and they wanted out of the investment. Of course, the devil will be in the detail.

One might argue providing local investors with sufficient sweeteners to compensate for the uncertainty around Kiwibank’s future could be a more costly option than committing to an IPO – enabling anyone to buy shares in the bank – albeit with the tech transformation in play.

Even Jurkovich (in August) said requiring Kiwibank to be 100% Kiwi-owned would be “restrictive” and see its share price discounted. He said a cap on the level of foreign ownership could be put in place as a safeguard.

The thing is, selling state-owned assets is a fraught political issue, even a centre-right party like National might be a wary of going near.

Kicking the can down the road until after the election, while finding a way to strengthen Kiwibank at no expense to the taxpayer, makes for a good short-term win for the Government.

It’s hard to know, at this stage, whether the proposal to welcome up to $500m of private capital into Kiwibank is a Band-Aid solution or a first step towards an IPO.

Either way, there appears to be some acknowledgement that while bolstering Kiwibank will support competition, it’s no silver bullet.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.