Hot competition from Aussie banks in deposit market forces Kiwibank to raise funds offshore

State-owned Kiwibank, which has raised all its funds from local depositors until now, has announced plans to start raising funds in offshore wholesale markets because of hot new competition from its Australian-owned competitors in term deposits locally. The Reserve Bank instructed all banks at the end of June to raise more funds from local 'Mum and Dad' depositors and more from longer term bonds offshore, rather than through the 'hot money' short term wholesale funding markets. That has helped increase term deposit rates and lift funding costs for all banks, which they have in turn passed on by raising longer term mortgage rates. NZ Post acting CEO Sam Knowles told interest.co.nz in an interview that Kiwibank may end up with 20% of its funding from offshore markets over time from 0% now, rather than the 50% that some of the Australian banks had until recently. "We're going to have to go offshore for funding. If the Aussie banks do more here in term deposits here then we have to do it," Knowles said.

The move tends to go against the grain of the Reserve Bank's push to reduce the reliance of the New Zealand banking system on 'hot money' from overseas wholesale markets that could freeze up in a financial crisis, as they did late last year. Meanwhile Kiwibank also went against the grain with its profit result for the year to June, which rose 43% on a normalised basis to NZ$52.5 million. The Australian-owned banks have been criticised by politicians and the Reserve Bank for having high profit margins on floating mortgage rates at least. The assumption by many is that Kiwibank's profit margins were lower than their big 4 competitors and also falling, given Kiwibank was very competitive last year in leading mortgage rates lower. Kiwibank's net interest margin as a percentage of total assets was stable at 1.9% for the year, whereas the other big four banks' net interest margins as a percentage of total assets have fallen. The most recent figures from ANZ show it fell to 2.05% from 2.21% last year, while ASB's fell to 1.78% from 1.82 the previous year. BNZ's margin fell to 2.20% from 2.25%, while Westpac's fell to 1.97% from 2.13%. This means Kiwibank's profit margins are higher than ASB's and only just below Westpac and ANZ. BNZ's margins are currently the highest. Kiwibank's margins have held up as it passed on the lower Official Cash Rate to its base of term depositors just as much, if not more, than it cut mortgage rates. It has not had to deal with higher funding costs from offshore funds or putting up its term deposits more aggressively, until recently at least. Meanwhile, Knowles also said Kiwibank had regular discussions with its shareholder and the government about whether to pump more capital into the bank so it could continue to grow its market share and apply pressure on the big 4 Australian owned banks to be competitive. Currently, the government had decided against pumping in more capital. Kiwibank essentially went on an acquisition spree in late 2008 before it ran out of spare capital to back the lending. Since then it has been more conservative with its mortgage rates and has followed the market rather than led it in 2009. Knowles said he was comfortable with Kiwibank's capital position at the moment and the bank would continue to extend its market share by generating capital internally from profits. NZ Post contributed an extra NZ$20 million of equity capital this year and Kiwibank raised NZ$60 million of tier II capital this year through a bond issue. The declared profit did not include an additional NZ$11.1 million that has resulted from a structural change in the ownership of the bank by New Zealand Post, whereby Kiwibank sold its NZ Home Loan Company and Kiwi Insurance to Kiwi Group Holdings, which is owned by NZ Post. This reduced Kiwibank's need for extra capital because of Reserve Bank rules. Kiwibank's impaired loans rose from NZ$4 million to NZ$19 million over the year, which represented 0.2 per cent of total assets, a lower ratio than those of Kiwibank's competitors, it said. Here is the full media briefing on Powerpoint below. Media Briefing Jun 2009

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