Kiwibank scraps plan for part-privatisation for now, due to Reserve Bank capital rule change

Partially floating Kiwibank on the NZX remains an option post-election. Photo / NMZE

Kiwibank’s parent company is scrapping well-advanced plans to bring private capital into the state-owned bank to help it grow.

Kiwi Group Capital (KGC) says Kiwibank doesn’t need more capital right now.

As announced on Wednesday, the Reserve Bank is reducing the amount of capital it requires banks to hold to protect their depositors in the event of a crisis.

KGC chairman David McLean told the Herald the change was worth about $500 million for Kiwibank - the same amount Kiwibank was looking to raise from third party investors, like KiwiSaver fund managers and iwi.

KGC also noted the fact that earlier this month it raised $400m of capital on the NZX Debt Market.

It said it had the capital required to grow.

Work had been underway to try to find investors to effectively buy stakes in Kiwibank.

This would have diluted the Government’s ownership of Kiwibank, but reduced the need for it to find money to inject into the bank to help it better compete with the big four Australian-owned banks.

KGC said its decision to scrap plans to part-privatise Kiwibank was driven by the Reserve Bank’s capital rule change and its strengthened funding position.

However, KGC hinted at it being difficult to put an attractive deal on the table for investors, while ensuring Kiwibank remained Kiwi-owned.

“While prospective investor feedback has been positive on Kiwibank’s performance and strategy, it appeared unlikely by the time of the Reserve Bank’s [bank capital] announcement, that terms would be able to be agreed with prospective investors that would meet KGC’s objectives for the transaction,” KGC said.

The Herald understands potential investors didn’t like the fact that if they wanted to sell their shares in Kiwibank, they’d have to sell them to the Government. The concern was, they might not have had much power to negotiate a good deal.

It was also difficult for KGC to promise investors they would be paid solid dividends in the near-term, as Kiwibank sought to grow.

And finally, there was uncertainty around whether Kiwibank would ultimately be listed on the NZX, like Air New Zealand and the electricity companies are.

National and Act are supportive of doing so, but the coalition Government has promised not to make any moves before the election.

KGC has been mindful of ensuring Kiwibank has sufficient capital to grow sustainably.

While it has been increasing its market share, growing too fast could require it to take on too much risk, by scooping up customers who can’t get loans from other banks for example.

While Kiwibank can compete on service, there are also limits on the extent to which it can compete on price, while remaining profitable.

Going back to the Reserve Bank, it estimated the mid-sized banks in the bucket it put Kiwibank in would be able to hold up to 21% less capital under its new rules, compared to what would have been the case once the old rules were fully implemented by 2028.

The Reserve Bank also expected its decision to release a more granular schedule for the amount of capital banks need to hold in relation to specific types of lending would help smaller and mid-sized banks better compete with the big banks.

Changing capital rules and giving Kiwibank access to more capital to help it grow were among the key recommendations the Commerce Commission made last year, further to a study it did on competition in the banking sector.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.

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