Bernard Hickey: Kiwibank's boom can't last forever

Kiwibank was the biggest mortgage lender in the December quarter, beating the big Australian banks for the first time.

It lent $871 million extra in the December quarter, more than quadruple its lending the same quarter a year ago and almost six times more than the biggest lender, ANZ National.

But even Kiwibank says this growth rate can't last, partly because its competitors are hitting back and partly because Kiwibank's owners, NZPost, will have to stump up a lot more capital to back the lending growth.

The December quarter was stunning for New Zealand's mortgage market in many ways. Interest rates fell the fastest in history as the Reserve Bank slashed the official cash rate from 8.25 per cent in late July to 5 per cent in early December. Kiwibank was the most aggressive and fastest to pass on the rate cuts.

The bigger Australian banks did eventually match Kiwibank, but were strangely reticent about fighting hard for market share.

ASB, BNZ, ANZ-National and Westpac were all protective of their funding during a long period when international markets virtually shut down.

About 40 per cent of the funds for these Australian-owned banks come from international money markets. They froze in late September and into October before defrosting slightly in November.

The banks are able to roll over short-term foreign debts, but only for relatively short periods and at much higher rates.

This restricted the big banks from competing hard because they wanted to preserve their profits and capital strength and chasing Kiwibank would have eaten into those profits.

Politicians and many borrowers may have preferred the banks to sacrifice those profits to match Kiwibank, but their high profitability has been the bedrock of their stability during the credit crunch.

The New Zealand banking scene has never seen a period where the market minnow, with just 3.3 per cent of the overall mortgage market, lent 66 per cent of the new mortgages.

But Kiwibank's stunning growth is likely to have slowed sharply in the March quarter.

Kiwibank chief executive Sam Knowles said after the bank's results that he expected it to ease because the other banks were now more certain of their funding and were getting back in the market.

This is true in that the Australian-owned banks started borrowing from the Reserve Bank in November in exchange for mortgage backed securities through a term auction facility.

Since then the banks have borrowed $6.95 billion from the Government, meaning they're a bit more cashed-up for lending.

But Kiwibank is getting short of capital and simply couldn't repeat last year's 50 per cent growth without another capital injection from NZ Post.

Kiwibank's tier 1 capital ratio fell to 7.3 per cent by the end of December from 8.3 per cent at the end of June, whereas ANZ National is on 8.2 per cent, ASB is on 8.4 per cent, BNZ is on 7.9 per cent and Westpac is on 7.8 per cent.

Given that another direct capital injection from the Government is unlikely and a private injection of equity is also out of the question, NZ Post is doing some fancy footwork and loading up its balance sheet with some more debt to put money into Kiwibank.

NZ Post's bond issue to raise $200 million will help, but Kiwibank will get only some of that.

Another sign that Kiwibank has put on the brakes is that it is not competing as hard for term deposits. Its rates are now below its competitors, but overall it will remain a competitive force after that amazing December quarter.