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

Posted in News Updated

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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Quote: "If the Aussies come

Quote: "If the Aussies come on shore and take our money....." - stop crying Sam!

What a cop out finally admittiing Kiwibank is now less competitive because of Aussie banks being prepared to pay more to local depositors. They are just more generous to us(admittedly for their own ends) than you.

I  watched the big banks deposit rates ever since I returned to NZ ( till I gave up watching Kiwibanks) and they'd always been better than Kiwibank's and yet Kiwibank's mortgage lending rates had not been proportionately lower.

The truth of the matter is Kiwibank made as much profit as it could out  of the parochialism of the Kiwis that chose to accept their lower rates and to bleat about CFR changes is just a red herring.

Welcome to the real world Sam.......

It's a weird way to try to

It's a weird way to try to spin it, misleading almost, it's not as if the Aussie banks are taking the money offshore,
they are still lending it back in NZ.

A couple of points to note

A couple of points to note about this article:

1.  I do not know of any of the Aussy owned NZ having 'difficulties' in accessing offshore funding.  It is freely available to these banks, but at a price.

2.  Gareth incorrectly uses the phrase 'term deposits' in the place of retail or customer deposits.  For example, Kiwibank increased their retail deposits by 3%, being all the deposit products they offer - transaction accounts, savings, call and term deposits

3.  It is very unlikely that the CFR is a core driver of competition.  We can assume all banks are currently at the 65% level or above.  Gareth did mention in a previous post that ANZ National was already at 75%.  We still do not know exactly where all the banks sit.  It cannot be calculated from the GDS statements as the calculation is quite complicated.

4.  Check the RBNZ website under statistical returns for the SSR.  You will see that growth in retail funding has fallen substantially.  Could it be that there simply isn't the growth available to Kiwibank?  Easy to blame something/someone else other than your ability to compete?

It's just a bit too easy to blame the regulators.  With or without regulation, the outcome for Kiwibank was written the moment the GFC started and offshore funding costs rose.  There'll be no going back to the good ole days with easy retail funding for Kiwibank.

The good news for Kiwibank though, with household debt growth slowing right down, is that there will be very little home loan growth to be funded.  This should buy them some time to develop new funding sources - most likely from offshore.

Two points about Kiwibank

Two points about Kiwibank term deposits:

1.) Kiwibank just needs to up their deposit rates abit and the deposits will flow back in.

2.) Kiwibanks needs to allow term deposits to be set up online. At the moment you have to print off a form, fil it out by hand and send it by post to Kiwbank, all very inconveient and customer unfriendly. Most other banks let you open a term deposit online and it is very easy.


Hi RamJett. When I opened a

Hi RamJett. When I opened a term deposit recently on kiwibank I was able to do online with no manual forms. This may have changed recently?

I agree that Kiwibank need to

I agree that Kiwibank need to be competitive to obtain / maintain market share. I will move my term deposit away at maturity if other banks are offering higher rates at the time.

last time i logged onto my KB

last time i logged onto my KB internet banking i was able to set up a TD. just go to "apply and open", the steps are easy to follow from there. 

Unless you're looking for a joint TD account. You can't set up a joint account as you are logging in under your personal access number. 


There is the secure email option where you can ask for anything and they set it up.


I use secure email all the time - you can access it through KB internet banking

Allied and SCF will give you

Allied and SCF will give you a better rate.

:) So will ASB and Rabobank.

:) So will ASB and Rabobank. I wouldn't want to be lining up at the GG gate to get my refund.

Sam Knowles clearly has not

Sam Knowles clearly has not even the most basic understanding of financial markets. Offshore funding cannot be turned into NZ dollars magically as he suggest . These funds have always been swapped for NZ dollars from within the NZ Banking system - in the same way as the Aussie banks are being forced to source longer term funding so is Kiwi Bank - has anyone looked at how short the duration of their NZ deposits is !!!  If the offshore funding was cheap as he suggested it is why hadnt he done it long ago !!!   The whole thing is a disaster waiting to happen. As to the value it makes 45M (which includes substantial subsidies from NZ Post) and he claims it is worth 1 billion - Why dont the press ask him how he justifies that given banks that small Regional banks in Australasia trade at 1.2 x book which makes it worth less than 400M or say 10 times earnings or 7-9 X earnings which puts it back at the same sort of figures- Take away the subsidy from NZ post which shows in the accounts as a payment for services  and the fact that half the staff are Post employees and you have a business that makes nothing

Peter Parker, FYI to your

Peter Parker,

FYI to your number 2) above. I have corrected that. You're right, it's an important distinction. Cheers.

I can't say I understand

I can't say I understand Knowles logic at all - the Aussie banks are naturally trying to fund from the cheapest source possible, and as a borrower through one of them, that's exactly want I want and would expect.


The cost of funding both locally and offshore is being forced together - if funding is cheaper offshore, the banks go there and the funding pressure and spreads on the local term deposit market fall. If its gets cheaper here, the funding pressure comes back locally and that gap with offshore funding shinks again


What's he actually complaining about, too much competition in the local market ? what does he expect ?

Ahh quick note there people.

Ahh quick note there people. Overseas funding has economic instability issues swarming all over it.

Ahh there's the exchange rate fluctuations for one. Yep bit of a classic consideration that suddenly lower NZD against the overseas markets we borrowed off on the SHORT TERM basis.


Holy wallet, my repayments have just balloned.


That is NZ's major issue in the future. Large debt and overseas funding to maintain it. Its a triple D scenario Deleverage, deflation, death to retail