Bernard Hickey: Partial Kiwibank sale good idea

Will Kiwibank shares soon be traded on the NZX? Photo / Kenny Rodger

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 this year. But that can only go so far. It needs fresh equity capital from outside investors. The cupboard is bare in the Treasury.

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 per cent 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 lending rates up while reducing deposit rates.

The government should look to sell up to 20 per cent 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 in the 1990s, 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?' 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 per cent 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 per cent of average assets.

Bernard Hickey