Gareth Vaughan argues Kiwibank's parent Kiwi Group Capital might be wise to back off TSB and dust off another growth plan for the bank

Last week Kiwibank CEO Steve Jurkovich compared the government owned bank's impact in the New Zealand banking market with that of the much hyped Macquarie Bank in Australia.

Jurkovich told interest.co.nz Kiwibank was "growing faster and doing a better job of disrupting the four big competitors than Macquarie is in Australia percentage-wise." Looking at Kiwibank's growth in home loans, deposits and business lending, this doesn't appear an outlandish claim.

The bank has, of course, been under instruction from the Government following the Commerce Commission's market study into personal banking services and the select committee banking inquiry, to be a maverick disruptor to the Australian controlled NZ banking oligopoly.

Kiwi Group Capital, Kiwibank's parent, has been encouraged by the Government to; "undertake work on alternative growth scenarios for Kiwibank along with the capital required for these."

One potential growth scenario has burst into the open with David McLean, Kiwi Group Capital's Chairman, offering Toi Foundation, TSB's shareholder, an alternative to the proposed sale of TSB to Heartland Group Holdings. It's a marriage between Kiwibank and TSB instead.

Whilst such an initiative from McLean and co might please politicians and be a more palatable option to some of the Taranaki community than a sale to share market listed Heartland, such a deal could carry significant risk and little upside for Kiwibank.

Justice Andru Isac's High Court judgment, blocking a Taranaki community based attempt to injunct the proposed TSB sale to Heartland, provided some interesting details. One is TSB's need to "undertake a multi-year digitisation project at significant expense." 

Not long before Jurkovich took the helm at Kiwibank in 2018, the bank had abandoned its CoreMod core banking system upgrade, booking impairments of $101 million. Having gone back to the drawing board to start again, Jurkovich says Kiwibank's now "two-thirds of the way, or 60-odd percent," through a technology transformation.

Taking on oversight of a similar project for TSB might not hold a lot of appeal, and could end up hamstringing Kiwibank's growth drive. So I asked Jurkovich about the reputation bank mergers have for being complex. 

"I don't think there's a bank in New Zealand at the moment that is not either kicked off its transformation...or put it on hold and [is] restarting it again. [And] if you think about bringing one of those banks together with another bank who's got its own set of interesting and fascinating things to do, that's not trivial. And so the history of [bank] mergers globally has proved that that's quite tricky. So if you're growing 8% year-on-year and you're winning [market] share, I think that's the thing I want to focus on," Jurkovich told me last week.

In the context of a Kiwibank-TSB tie-up, the risk may be greater than the reward. That's because you'd just get a slightly bigger version of what Kiwibank is now, need to upgrade TSB's tech and align it with Kiwibank's, and rivals would aggressively target the combined entity's customers as a merger bedded in.

In terms of lending, both Kiwibank and TSB are housing lenders with bits tacked on. Kiwibank has 85% of its lending in residential mortgages, TSB 84%. Both have funding that's dominated by deposits. Adding TSB's total assets to Kiwibank's gives a combined figure of about $54 billion, inching closer towards the about $130 billion total assets of Westpac NZ, the smallest of the big four banks.

At the time of writing I've not seen details of any Kiwi Group Capital proposed tie-up between Kiwibank and TSB, and it's not clear whether Toi Foundation will consider it. However, on the face of it Heartland and TSB appear to complement each other better than Kiwibank and TSB, leaving aside any questions around the structure or value of the Heartland proposal, and Taranaki community desire to retain their own bank.

In NZ Heartland Bank specialises in reverse mortgages, car loans, asset finance and the rural market including livestock loans. TSB would give it a solid foothold in residential mortgages and what Heartland describes as "full-service banking capabilities" in NZ. As a listed company and with Heartland Bank Australia across the Tasman, Heartland also has a range of funding and capital levers to pull.

So from a Kiwi Group Capital perspective, it might be best to back off TSB and dust off another growth plan for Kiwibank whilst letting the proposed Heartland deal run its course.

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