Knowles outlines Kiwibank dilemma: Growth vs dividends

Knowles outlines Kiwibank dilemma: Growth vs dividends

Departing Kiwibank chief executive Sam Knowles says the state owned bank has the potential to grow further and faster over the next decade than it has in its first eight years, but this will require its Government shareholder to forsake dividends.

Kiwibank announced on Wednesday that Knowles, the bank's founding chief executive, is leaving. Knowles told a news conference he had been mulling stepping down for a couple of years and him leaving was not linked to a suggestion by Finance Minister Bill English last Friday that Kiwibank could be partially listed on the sharemarket.

Knowles added that he would stay a few months to help with the transition to an as yet unselected new chief executive.

"Then I’ll take a bit of a break and then I’ll work out where I’m going," Knowles said. "I am looking for some new adventures. I haven’t decided quite what."

Kiwibank, which opened for business in February 2002, had total assets of NZ$12 billion at December 31.

"It’s a natural point in the evolution of Kiwibank for me to stand back and let someone else take over," Knowles added.

A recent request by Kiwibank's parent NZ Post to the Government for fresh capital for the bank amounted to less than NZ$100 million, Knowles said. A business plan for the next decade had been put to the Government which envisaged Kiwibank growing its balance sheet by between NZ$2 billion and NZ$3 billion annually. The plan envisages growing Kiwibank "further and faster" Knowles said, including in the business market.

As of December 31, just over NZ$400 million worth of the bank's NZ$9.7 billion in net loans was with corporate customers. "A lot" of business people continually approached Kiwibank saying they would like the bank to be in their markets. This sort of expansion, in a controlled manner, would be sensible and was under discussion with the Government.

Chairman Jim Bolger noted an email he had received from "a person of substance" in the agricultural sector wanting Kiwibank to support that sector.

"Two days ago I got an email from someone operating in the agricultural sector wanting to come and see me and said 'we must talk because we have to get more investment in that sector. Currently the other banks are not investing here and this is holding back New Zealand’s core industry'," said Bolger. "The demand for Kiwibank to expand its reach is everywhere, we get it all the time."

However, Knowles said Kiwibank didn't require large amounts of capital to continue growing, but the Government would have to reinvest its dividends. The bank made a profit of NZ$23.5 million in the six months to December, this was down 9% and included payment services fee income from NZ Post of NZ$27.2 million.

Knowles suggested English's comments that Kiwibank could need hundreds of millions of dollars of capital over the next few years was probably a reflection of dividend reinvestment.

"The dividends that he wouldn’t get," Knowles said.

He noted Kiwibank recently raised NZ$150 million through a public debt issue and could raise more. It raised NZ$309 million through an Australian bond issue last year.

"We don't have a need (for money) today. It’s more if you are going to continue to grow you’ve got to make sure your shareholders are as committed as you are to that reinvestment," said Knowles.

"The key thing is that the shareholder’s comfortable that it’s not going to get those dividends, that they’re going to be reinvested and that it’s going to be part of that growth story for Kiwibank."

The bank has never paid a dividend.

Despite uncertainty around the bank's future ownership, Knowles said he had "no concerns whatsoever" over Kiwibank's future. It had passionate customers, with some in recent days going as far as saying they'll take their custom elsewhere if the bank is privatised, and equally passionate staff. Knowles said an analogy he had used when talking to staff was that Kiwibank had grown from something resembling a garage band to something more like the symphony orchestra.

"The reason I’m confident about the next years is that we’ve defined where we want to go, we’re got the people to do it, we're just going through a process of making sure the shareholder also supports it."

However, keeping New Zealand control of Kiwibank was part of the value of Kiwibank and part of the bank's success.

"Personally I believe that New Zealand control is important," Knowles said.

Bolger moted what had been said so far on a potential sell down of Kiwibank by the Government was merely "musings" with nothing firm stated.

"(But) I think the Prime Minister has moved carefully to say mom and pop investors. I think you’ve got a lot of territory to be covered before anything happens."

Meanwhile, Bolger predicted Kiwibank would be "inundated" with applications for Knowles' job including from some very strong internal applicants. Given the nature and profile of Kiwibank, he expected the successor to be a New Zealander.

 This article was first published yesterday in our paid subscriber email for bank executives, regulators and other industry experts. Subscribe here or email bernard.hickey@interest.co.nz

 

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