By Alex Tarrant
Kiwibank is expecting a profit of at least NZ$50 million in the current financial year, with those earnings to be retained rather than paid out as dividends to help grow the state-owned bank's footprint in the market.
The substantial profit, and possible similar retained profits in the 2012/13 and 2013/14 years, are set to be the main driver of a NZ$156 million increase in the Crown's investment in Kiwibank's parent, New Zealand Post over that time.
If that is the case, then it may lessen the need for Kiwibank to go cap-in-hand to the government for a capital injection to help with its growth ambitions. Banking analysts believe the bank needs another NZ$200 million in capital over the next four years to become self-sustaining and able to pay dividends.
The expected profit of at least NZ$50 million this year comes after Kiwibank's profit fell by more than half to NZ$21 million in the year to June 2011 from the year to June 2010. Kiwibank made a net profit of NZ$45.8 million in the year to June 2010 and a net profit in the year before that of NZ$63.6 million in the year to June 2009.
Kiwibank bounced back from that by starting the current year on a strong note, posting a NZ$17.6 million profit in the September quarter as it grew its net interest income by 38% to NZ$58.9 million over those three months. Kiwibank's six-monthly figures are expected later this month.
Interest.co.nz reported on Tuesday that the Crown's investment in New Zealand Post was expected to rise by NZ$156.2 million over the next three years, from total shareholder funds of NZ$687.7 million in 2011/2012 to NZ$843.9 million in 2013/14, according to NZ Post's statement of corporate intent 2011-2014.
The statement notes NZ Post's performance targets reflected the pursuit of growth opportunities in Kiwibank in particular, although it would also focus strongly on productivity and margin improvements within its traditional postal related business, and improvements in its investment portfolio.
NZ Post said it would target a minimum dividend return to the government of NZ$5 million each year over the next three years.
"The level of dividend declared is aimed at allowing New Zealand Post Group to continue execution of its business strategy and planned investment without recourse to the shareholder while maintaining a long-term sustainable capital structure consistent with a long-term AA- credit rating," it says in the statement of corporate intent.
"New Zealand Post Group acknowledges the shareholder's expectations and will continue to actively monitor and review the potential for increased returns to the shareholder," it says.
A spokesman for Kiwibank told interest.co.nz that the NZ$156 million increase in the government's investment in NZ Post was set to be driven by retained earnings from Kiwibank. The bank was looking at hitting a profit of at least NZ$50 million this year, the spokesman said.
Potential retained earning of about NZ$150 million over the next three years will not go amiss at Kiwibank, as it attempts to expand its services to better take on the 'big four' Australian owned banks, ANZ National, ASB, BNZ and Westpac.
NZ Post said in the statement of corporate intent that it would like to see banking growth through diversification.
"Successful entry into new markets, including corporate and commercial, transactional banking, rural, Maori and bancassurance [will ensure] Kiwibank becomes a full service New Zealand owned bank with a strong community presence," NZ Post says.
Capital injection request not expected anytime soon
Analysts believe Kiwibank needs about NZ$200 million over the next four years for the bank to become self sustainable and able to pay dividends. See Gareth Vaughan's December 23 article, Some 14 years after it launched and nearly NZ$830 mln later, Kiwibank predicted to become a self sustaining dividend payer in 2016.
Interest.co.nz understands the government and Kiwibank are set to discuss the bank's business model and growth ambitions in about three months' time. However, the government is not keen on entertaining the topic of big capital injections from its balance sheet to the bank.
A tight fiscal environment - new budget spending is capped at NZ$800 million this year, and most of that will go into health and education - means the government is likely to defer any such request until it at least reaches fiscal surplus in the 2014/15 year.
If Kiwibank is able to retain earnings of at least NZ$50 million over the next four years, the government may not need to be called upon.
However, one potential source of capital could come from the proceeds of the government's 'mixed-ownership model' sell-down of shares in four state-owned energy companies.
The NZ$5-7 billion in expected proceeds from the 49% floats of Mighty River Power, Genesis, Meridian and Solid Energy, as well as a partial sell-down of the government's holdings in Air New Zealand, are to be earmarked in a 'Future Investment Fund' and used for new capital spending over the next five budgets.
So far, NZ$1.48 billion of the proceeds have been committed to projects, such as school upgrades and irrigation investment.
Announcing the fund in the run-up to last year's election, Prime Minister John Key noted that some of the proceeds could be used for a capital injection into Kiwibank.
The sell-down of the energy companies begins sometime in the third quarter this year with Mighty River Power, which could bring NZ$1.8 billion into the government's coffers from a 49% sale.
The Kiwibank spokesman said if Kiwibank were to approach the government for a capital injection, it would be tight-lipped about the request.
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