Kushlan Sugathapala: Kiwibank 2.0 is a wealth of opportunity

Inside the new Kiwibank head office in Fanshawe St, Auckland. Photo / Dean Purcell

OPINION

Kiwibank is now wholly owned by our Government. While only a change from four state owners to one, it is a potential game-changer.

A wholly state-owned bank has less pressure to maximise profit; is free to operate with a public mandate to support national economic objectives.

European state-owned financial institutions give us a glimpse of opportunities for a well-funded state bank. In New Zealand, it can benefit all of us by lowering the high banking costs and interest that we pay.

We had two state-owned banks before the market reforms of the 1980s. Postbank, which
started operations way back in 1867, was sold off in 1989 to ANZ, which now has the highest market share and makes $2 billion annually. State Advances Corporation, which started in 1903, specialised in mortgages, including low-interest loans for low-income earners. It went through many iterations and was wound up following the economic reforms of the 1980s.

In Europe, wholly and partly state-owned banks have competitive market shares and play a vital role in many countries. According to a study commissioned by the European Public Banking Association, 21 per cent of the total financial assets in Europe have some state investment (it's much higher in Western Europe), with controlling stakes in more than half of them.

The Norwegian Government has a significant share in DnB NOR which holds 45 per cent of domestic financial assets. It has fully controlled banks in specialised areas like education loans, exports and Innovation Norway. In Germany, the state owns regional banks with over 25 per cent market share and has a strong regional development and community focus.

In Switzerland, regionally-focused banks and PostFinance have over 23 per cent market share. Then there are pan-European banks like the massive European Investment Bank, which focuses on supporting SMEs and EU priorities like climate adaptation, and energy security.

Many state-owned banks focus on specialised areas like supporting SMEs, innovative companies, export promotion, education, affordable housing, climate finance, long-term infrastructure projects, regional development and municipality funding. Others operate as general purpose banks or with a mix of objectives.

Economist Cameron Bagrie wrote in a Herald article recently that bank loans exceed $500b (our annual GDP is only $360b). The Aussie banks are among the most profitable in the world and even more profitable in New Zealand than in their home market.

Over $6b in profits flow overseas annually from the Australian banks.

Illustration / Daron Parton

Our bank lending is heavily skewed towards low-risk housing loans with far less focus on encouraging entrepreneurship and innovation. Cameron said we need more competition; and noted that loans to SMEs have shrunk over the past four years. He called for banks to be bold and look for opportunities beyond housing and finance economic growth.

Who better to lead the way than a well-funded state-owned New Zealand bank?

New Zealand is perhaps the only country where the market is dominated by overseas-owned banks to this extent. Overseas-owned banks are insensitive to local and national objectives like regional development and community needs.

The criticisms of Kiwibank generally centre around its small market share of around 6 per cent and that it operates much like just another commercial bank. Many commentators are too hung up on the performance of state banks 40 years ago. The management of state-owned enterprises has improved since then, arguably better than many large private sector companies For example, Fonterra and Fletcher Building a few years ago posted losses of over $500m. (Most recently, Fletcher reported a net profit of $432m and Fonterra showed a net profit of $472m for the nine months ended April 30, 2022).

Kiwibank is profitable, has more than doubled its capital base and has an AA rating.

This will be a low-risk investment, certainly far less risky than owning an airline. Our banks are some of the most stable globally and have survived, even thrived, during the recent economic crises. Non-performing loans of our banks sit at 0.4 per cent (Kiwibank is only 0.25 per cent), and the Reserve Bank is gradually increasing the capital requirements to reduce risk to once in a 200-year event.

Internationally, recent bank failures have been commercial banks driven by greed - chasing high profits and incentives, not state banks.

Kushlan Sugathapala. Photo / Supplied

Kiwibank's capital is only $2.1b compared with Westpac, the smallest Australian bank, at $8.4b (Westpac makes around a billion dollars a year on this investment).

Kiwibank is not even able to service the requirements of the Government, which banks with Westpac.

The Government doesn't need another $6b to compete with the Aussie banks. Suppose the Government invests another $3b (an investment, not a cost). It should be able to build its capital base while growing its market share to compete with the big four banks.

A sufficiently capitalised Kiwibank will have a captive market; central government collects and spends more than $100b annually. Then we have the local government bodies and state-owned enterprises. You also have financing requirements of the state sector (Auckland Council alone has loans of over $10b) and a fair slice of the $500b loan market.

A competitive state bank can play a significant role in getting better pricing for banking services for the public and the Government, bringing banking sector profitability more in line with Australia.

If a $5b investment in a low-risk venture can deliver stable profits of $500m to $1b for the Government. Support national economic objectives and bring down banking costs for all New Zealanders.

What's stopping us?

• Kushlan Sugathapala researches and writes on social issues.

Editor's note: The article originally referred to Fonterra and Fletcher Building "recently" posting losses of over $500m. Those losses were for the 2018/19 financial years, not the most recent reporting period when both companies reported significant profits.