Why Kiwibank should be only partly privatised

Why Kiwibank should be only partly privatised

Finance Minister Bill English has raised the idea of partially floating Kiwibank, but only after taking the idea to voters before the next election. 

Here's what he had to say, as reported by the NZHerald.

Mr English, fresh from delivering the 2010 Budget, told a gathering of South Island business people yesterday that the Government might consider a change of policy "to free up capital and put product on the market for Kiwi mums and dads".

Kiwibank was a good example of an asset that needed to be dealt with. It had reached the size where it needed either a Government guarantee or an "awful lot of capital".

"If there's any asset that's regarded as risky by credit rating agencies, it's a small, fast-growing bank," he said. "So one option would be to go to the market and raise capital. Keep majority Crown ownership, but raise the rest of the capital from the market.

"It would certainly help us to be able to free up that capital. But we've made undertakings to the public and we certainly won't move anywhere without getting a mandate to do so." Asked who would support that, only a few audience members raised their hands.

Partial sale of state-owned assets, including power companies, was one of the main recommendations from the Labour-initiated capital markets development taskforce last year. But National set it aside, saying it would stick to its election policy of no state asset sales in its first term. A spokesman for Mr English said last night that National's position had not changed and if it did, "everyone will know and the Government will campaign on it at the next election".

My view

I think a partial sale of Kiwibank to retail investors through a stock market float is a good idea within limits. An NZX listing with independent directors would apply the disciplines of private ownership that have helped Air New Zealand become one of the best performing and most profitable airlines in this part of the world. 

It would also give Kiwibank a vehicle to grow faster and put even more competitive pressure on the big four banks. Kiwibank is in a tough position at the moment. It can only continue to grow very fast with extra capital to back all that lending. Until now, it needed its shareholder, NZ Post, to stump up with the money. It has managed so far to get by, thanks in part to a clever tier 1 preference share issue to retail investors. But that can only go so far. It needs fresh equity capital from outside investors.

But the government and Kiwibank should be careful not to go overboard. The temptation would be to try to sell the whole thing or more than 50% because that would generate the best price up front. The first people to bid for Kiwibank would be one or all of the big four Australian banks. If successful, that would reduce competition and push up prices (lending rates up and deposit rates down) for customers. 

The government should look to sell up to 20% and limit the sale to 'Mum and Dad' investors and a few institutions. This was done by the Australian government when it sold Commonwealth Bank of Australia and Qantas, helping to generate the sort of retail investing culture that now serves Australia extremely well. 

New Zealand's stock market is dangerously thin and weak. It has no listed banks and large parts of the economy are under-represented. There are few 'brand name' companies on the exchange and retail investors are rightly asking: 'if I can't invest in rental property where can I invest?'

New Zealand's stock market is dangerously thin and weak. It has no listed banks and large parts of the economy are under-represented. There are few 'brand name' companies on the exchange and retail investors are rightly asking: 'if I can't invest in rental property where can I invest?' Kiwibank would make a good start. The energy companies (Meridian, Mighty River, Genesis and Solid Energy) could be the next cabs off the rank.

There is one potential drawback in this approach. Kiwibank is currently not as profitable as the big four banks and would rightly come under pressure to increase its profitability, possibly by lowering deposit rates and increasing lending rates. Kiwibank's profit as a percentage of average assets was 0.6% in 2009. This was above the levels produced by the other four banks in 2009 because of the big tax bills the other four paid last year, but normally the big banks are producing profit of around 1% of average assets.

Here's the Green Party's view:

Privatising Kiwibank will see even greater amounts of capital leave our shores in the form of bank dividends drained from our economy by the foreign owned banks, the Green Party said today. “Over the last five years, the big four foreign owned banks sent close to 75 per cent of their profits off-shore in the form of dividend payments to their overseas owners. Only a quarter of profits were re-invested in New Zealand,” said Green Party Co-leader, Dr Russel Norman.

“If the Government was to privatise Kiwibank, the dramatic flight of capital out of New Zealand by the foreign banks would become even more pronounced.” Foreign-owned banks make up 90 per cent of the banking market here in New Zealand. Their profit levels have grown substantially until the recent financial crisis, but even the recession hasn’t stopped the significant proportions of profit distributed as dividends. Last year, despite provisions for bad debt totalling $2.4 billion, the banks still managed to distribute 91 per cent of their net after-tax profits.

“No matter how you frame the sale of Kiwibank, it will inevitably end up in foreign ownership. These owners will also demand a similar stream of profits from their investment,” said Dr Norman. “In the last five years alone, $9.5 billion in bank dividends have gone off-shore, fuelling our current account deficit and starving New Zealand businesses from much needed capital to fund their growth. Last year, the Parliamentary Inquiry into Banking found that New Zealand does not have a competitive banking sector.

The Inquiry found that up to 70 basis points of Official Cash Rate (OCR) cuts were not passed on to the banks' customers representing an additional $2 billion in interest costs gauged from the farm, business, and home mortgage sectors.

“Kiwibank has consistently offered better deposit rates and lower lending rates than the big four overseas-owned banks, and, by keeping their profits here in New Zealand, has fuelled a small but virtuous cycle of re-investment in New Zealand’s long-term economic prosperity,” said Dr Norman. “Kiwibank is the only large competitor to the big banks. “It seems surreal that soon after the banks were convicted for illegally avoiding nearly $2billion in tax, National and Act would reward them by removing their only large competitor.”

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To all,

I've just added the Green Party's view on any Kiwibank privatisation. They make some points, not all of which I agree with.

I agree Kiwibank has boosted competition in the sector.

Whether that competition would go away with partial privatisation is another thing.

Another issue not addressed in the Green Party statement is how we can create more liquid stock markets without privatisation of state assets. I can't see how it could be done.

There is an inconsistency there for the Greens. They want a capital gains tax and to reduce over-investment in housing, but they're not so keen on the stock market.

Something has got to give there.

cheers
Bernard