Issuing debt, tapping 3rd party investors or an IPO touted as ways for the Government to boost Kiwibank's capital and thus its competitive position

Treasury has advised cabinet ministers the Government could boost Kiwibank's capital either by issuing debt securities, sourcing new capital from third parties, or via a share market initial public offering (IPO).

These options are set out in a Treasury paper dated July 31 for Finance Minister Nicola Willis, State Owned Enterprises Minister Paul Goldsmith, and Associate Finance Minister Shane Jones. Treasury released a redacted version of the paper, Kiwibank Competitiveness Considerations, under the Official Information Act.

The paper came after the release of the draft report from the Commerce Commission market study into personal banking services, but before the August 20 final report. However, both reports recommended the Government, as Kiwibank's owner, look at how to provide the bank with more capital to better enable it to compete with the big four banks, ANZ, ASB, BNZ and Westpac.

The three options canvassed in the July 31 report, for the Government injecting capital into Kiwibank, are obvious ones.

The first is; "issuing additional government debt securities in the market lifting net core Crown debt, and/or displacing other Crown-funded priority policies."

The second is; "sourcing capital from third party professional investors, including Crown Financial Institutions." 

"Growth capital could be sourced from third parties, including the investable funds of Crown Financial Institutions. This would mean the central Crown would share the business risk, of a larger bank, with those other parties and would also share the earnings – and if the other parties are non-Crown entities this would be recognised as minority interests in the Crown’s consolidated financial statements."

"So long as profitability is similar to, or better than, that prior to any capital raisings, the impact on Operating Balance before Gains and Losses (OBEGAL) should be neutral to positive. There would be no impact on the Crown’s net core Crown debt as the Crown would not be raising any additional government debt (Kiwibank’s borrowings are not included in that calculation)," Treasury says.

And thirdly, an IPO.

"For a bank which has New Zealand ownership as its point of difference, the natural progression for Kiwibank in raising capital in the medium term is through an IPO. This would offer a broader ownership directly than would private capital raising and would remove some of the challenges that arise for illiquid investments (higher return on investment required by investors, greater involvement in governance, more complicated exit provisions etc)."

Kiwibank CEO Steve Jurkovich told interest.co.nz last year a partial government sell-down via an IPO; "wouldn't be that much of a hurdle for us." However, Jurkovich said a requirement for Kiwibank to pay a sizeable dividend would be a significant change for the bank, if it was made. That's because retained earnings are Kiwibank's key means of increasing its regulatory capital.

Treasury points out as long as the Crown directly or indirectly retains a shareholding sufficient for it to be considered the controlling shareholder, Kiwibank would continue to be fully consolidated into the Crown’s financial statements.

"A non-controlling shareholding would need to be accounted for using the equity method, sometimes referred to as 'one-line consolidation.' This would be a more complex set of changes but as it appears unlikely to arise in the foreseeable future, we do not dwell on it further in this report," says Treasury.

Treasury also notes introducing any third-party shareholders into Kiwibank or its parent company Kiwi Group Capital, or if an IPO is considered, the collective arrangements will require Reserve Bank approval. Additionally Treasury says there'll be "some important considerations" relating to governance to be worked through.

"Kiwibank is now well progressed with a bank-wide transformation programme to improve business systems including a new cloud-based core banking system...If completed successfully, this will provide the platform for more cost-effective growth as scale increases. Since 2017, Kiwibank has sought to grow its market share in both the retail and business markets, particularly small-to medium sized enterprises (SMEs), with the latter targets for substantial growth from a relatively small base," Treasury says.

The Commerce Commission says in the short-term, capitalising Kiwibank; "appears to have the greatest potential to constrain the major banks and disrupt a market that is otherwise stable due to lack of competition."

After the release of the final Commission report Willis said Treasury was working with Kiwi Group Capital to provide advice before the end of 2024 on options for raising new capital, including from KiwiSaver funds, New Zealand investment funds and investment from regular New Zealanders.

Treasury notes since its 2002 launch Kiwibank has gained market share, rising from 2.4% of loans and advances to retail customers and businesses, excluding the agricultural sector, in June 2008 to 6.47% this year.

"At 6.47% of overall lending, Kiwibank’s market share is still well below that for the four major banks. Since March 2011, Kiwibank may have increased its market share by around 50%, but for the overall marketplace that is a relatively small change."

Treasury's paper notes Willis sought advice on ways Kiwibank can contribute to increased competitiveness in the businesses in which it operates being home lending, personal banking services and business banking. It also says once the ministers have made decisions in relation to the matters raised in the report, Treasury will engage with Kiwi Group Capital and Kiwibank.

At the National Party conference on August 3, Willis said it was time to look for outside capital for Kiwibank.

*Also see: How could Kiwibank gain the scale required to become the banking disruptor championed by the Commerce Commission?