Mortgage firm backs Kiwibank as a disruptor
Squirrel Mortgages says it makes sense for Kiwibank to be given more capital to substantially grow its balance sheet and become a disruptive competitor.
Wednesday, August 7th 2024, 11:56AM 
2 Comments
At the weekend finance minister Nicola Willis told the National Party Conference she wants to look for external investors for Kiwibank to take on the big four Australian banks.
She says Kiwibank can’t become a disruptive competitor without extra capital. “And I am interested in exploring where that capital might come from.
“So, let’s have a look at what’s possible. It’s time to explore all the options.”
Her speech follows the Commerce Commission’s recent study into banking competition. It recommended injecting more capital into the bank as the best way to enhance competition in the short term.
The study says disruptive forces are needed to drive change. “No more cozy oligopoly. Instead, we need more mavericks.”
It also comes only two years after the previous Labour government brought Kiwibank entirely into state ownership for $2.1 billion.
Below market
Squirrel Mortgages, which places a chunk of mortgages through Kiwibank, says the New Zealand bank has already proved it can be competitive.
Chief executive David Cunningham says last year when banks were expanding margins on home loans, Kiwibank sat below market for a while. “At the time we commended Kiwibank for it.
“The problem was it ran out of capacity in terms of processing capability and so the bank stopped its below market activity simply because it got so much volume.”
He says that shows when a lender sits below market for a period of time, it can get substantial volume. The commission’s banking competition study observed no bank is really ever above or below market for long, with Kiwibank being the possible exception. “But even then it wasn't sort of that obvious. The insight is that if a bank is prepared to be price competitive there is substantial growth opportunity and Kiwibank demonstrated that.”
Fertile territory
Cunningham says Kiwibank has a “shed load” of customers – one in four New Zealanders. While its market share of mortgages at 7% is still low and not consequential these things grow gradually over time. “It feels to me like fertile territory.”
He says the bank is being run well and making good progress. “While it is not quite a maverick in the market, such as Macquarie, it is the only bank that comes close. Smaller banks, such as SBS and TSB just don’t have the capital.”
While the Australian banks have a low cost to income ratio and Kiwibank’s is higher, it is about scale and that can be grown, Cunningham says.
Kiwibank is only 20 years old, compared to the bigger banks' 100 to 200 years and it takes time to build scale, which is part of the competitive advantage the Australian banks have. “A bigger balance sheet for Kiwibank that is funded makes sense.
“If the government is going to back Kiwibank to become a disruptor it will be warmly supported by New Zealanders to invest money to provide equity for the bank to grow.”
It would be good for the brand, Cunningham says, with perhaps a ban on any foreign ownership, such as the golden share Telecom had years ago. “From a branding perspective it would be clever to keep it 100% New Zealand.”
Arguably it is a stepping stone to privatisation in a decade, but as seen with power companies, it works well with the government owning 50% and private New Zealand shareholders holding the rest, he says.
Cunningham doesn’t think anybody can look at today's return on equity for Kiwibank and say, ‘Well, why would anyone want to invest in that’? I think you go, ‘Well, what does the return on equity look like in five to ten years’ time once it's built some scalability’?
Serious risks
However, a banking academic told BusinessDesk Willis’ push to make Kiwibank a disruptive force is bordering on the “irresponsible”.
Victoria University of Wellington associate professor at the school of accounting and commercial law, Martien Lubberink said Willis’ approach potentially carries some serious risks from a financial stability point of view.
“Because what she is expecting is that a relatively small mid-size bank, which has barely sufficient capital and struggles to increase capital to meet the Reserve Bank’s requirements which are going up all the time, to become a disruptor and to address the issues of a lack of competition.”
Lubberink says the proposal is “irresponsible” because encouraging KiwiBank to become a disruptor will mean more risky lending.
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Comments from our readers
The fact that the NZ taxpayer is still having to prop Kiwibank up after 20+ years illustrates that the Government’s experiment owning a bank hasn’t worked. New Zealanders have not seen a significant impact on the cost of borrowing money since Kiwibank’s arrival. To say Kiwibank has a unique role to play in the NZ banking sector as a disruptive force is false.
New Zealanders and the mortgage adviser industry should instead be supporting a locally owned bank like The Co-operative Bank which is owned by its customers and has shared with them $20+ million since 2013 via rebates. As shareholders, Co-operative Bank customers can also have their say at their AGM and annual director election. This is a far cry from how Kiwibank is currently held accountable to NZ taxpayers.
The Commerce Commission’s recent study into banking competition which recommended injecting more capital into the Kiwibank as the best way to enhance competition in the short term is a joke for those reasons noted above. Wellington bureaucrats and the regulation they currently produce annually are the single biggest obstacle to increased competition in the banking sector. The same also applies to other industries in New Zealand. We saw HSBC exit the New Zealand home loan market last year sighting this increased regulation as one of the reasons they were pulling out. Maybe the climate-related disclosure requirements introduced for large publicly listed companies, large insurers, banks, and investment managers was the final straw. New Zealand needs more main bank lenders operating not less as this will ultimately see more customers getting a better deal on their home loan.
As a small country we need to start having a serious conversation now about the amount of overregulation that has occured and the subsequent impact it’s had on competition for Kiwi consumers, home loan customers included. Overregulation in New Zealand is preventing disruptive competitors from entering the market. Might be time for the Commerce Commission to wake up and get their heads around that fact. The NZ taxpayer pouring yet more money into Kiwibank is most certainly not the solution.
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Tax payers have already bailed out other Government owned banks like the BNZ which cost the tax payer not once (634 million) but twice (720 million) when it was close to collapse, In my opinion Government departments have no place let alone skill in running profitable banks using tax payer funding, a recipe for disaster, Kiwi bank should be sold and sold now.