Kiwibank is reporting a record profit, partly thanks to one of the Reserve Bank’s (RBNZ) Covid-era money printing programmes.
Kiwibank’s profit after tax rose by 34 per cent, to $175 million, in the year to June as it was particularly effective in the way it used its funding to generate revenue.
Accordingly, the state-owned bank’s net interest margin rose by 35 basis points to 2.48 per cent. This was above the industry average, which last sat around the 2.50 per cent mark in 2006.
Speaking to the Herald, Kiwibank chief executive Steve Jurkovich explained the bank relied more than its Australian-owned competitors on the RBNZ’s Funding for Lending Programme (FLP), which gave it access to relatively cheap funding.
Between December 2020 and 2022, the RBNZ created $19 billion and lent it to banks at three-year terms.
It did so to ensure banks had access to funding to keep lending, thus stimulating the economy, at a time when low – if not negative – interest rates could have seen them struggle to attract funding from depositors.
The RBNZ is charging banks interest at the Official Cash Rate (OCR) on FLP loans.
While this is resulting in banks paying the RBNZ more in interest now than they did when the OCR was at rock bottom, the FLP is still giving banks a pretty good deal.
Jurkovich said because Kiwibank drew down its full allocation from the programme, it isn’t as reliant as some of its competitors on securing funding from increasingly costly wholesale markets and retail deposits.
“At the moment, bank interest income is probably about as good as it’s going to get,” Jurkovich said.
“We certainly see it going down and returning to the much more normal range.”
Kiwibank borrowed $1.38b via the FLP. To put this in context, Jurkovich said a bank of Kiwibank’s size would usually look to secure about $2.2b of funding in a year.
ANZ drew down $3.5b from the FLP, ASB $5b and BNZ $3.4b. Westpac wouldn’t say how much it borrowed.
The FLP has been the source of much debate.
Critics said it was counterproductive for the RBNZ to continue creating money and lending it to banks when inflation became a problem and the RBNZ started lifting the OCR in response.
However, the RBNZ didn’t want to stop the programme, because it committed to keeping it in place for two years.
It argued the programme isn’t hampering its efforts to tighten monetary conditions because banks are paying more interest on FLP loans as the OCR rises.
Nonetheless, the RBNZ eventually conceded it could’ve included an early termination clause in the FLP’s terms and conditions to give itself a way out.
While the FLP bolstered Kiwibank’s net interest margin, Jurkovich said its return on equity and return on assets – other measures of profitability – weren’t as strong as its Australian competitors’.
Asked why the profitable state-owned bank wasn’t offering customers more attractive interest rates, he said, “I don’t mean to sound all corporatey, but we can’t grow, and we can’t invest if we don’t make solid returns.
“When the returns are half what the big four [banks] are making and they’re 85 per cent of the market, I think the conversation is really for those four to answer …
“We want to be the best bank we can be – not the cheapest.”
The Government acknowledges Kiwibank needs more capital to both satisfy its regulator and grow to the extent it can be a real disruptor in the market.
Last month, Kiwibank’s parent injected $225m of capital into the bank, the proceeds coming from the $310m sale of Kiwi Wealth to Fisher Funds.
Jurkovich said Kiwibank had planned to receive the injection, “but we couldn’t expect it”.
He said the capital would keep the bank going for the next two or three years.
Jurkovich had no reason to believe a potential change of government would materially change Kiwibank’s outlook or its prospects of securing capital.
He noted the current Government wanted Kiwibank to “grow and be more impactful”.
“Most governments seem to think that’s a good idea because of the market structure.”
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.