Kiwibank today, what will the government want to own tomorrow?
I almost choked on my Weetbix this week when I read that the Government is to nationalise Kiwibank for some $2.1 billion. The first image to spring to mind was the societal and economic damage to Venezuela caused by Hugo Chavez when his government took over oil and gas in the country first, then cement, steel and then supermarkets and even glass manufacturing. Surely we can’t be headed down the same path here in New Zealand? Is the Labour Government going to stop at Kiwibank or might the NZ offshoots of certain of the Australian banks be targets also? What about other sectors of the economy? The gentailers could be aggregated and nationalised, Air New Zealand, maybe water infrastructure – my mistake, that’s already underway – or what if the Government were to establish a “Kiwifood” supermarket operation to take on Foodstuffs and Woolworths? Or “Kiwigib” to take on Fletcher Building etc etc…
Many would argue that Government ownership of commercial enterprises / businesses does not work as commercial success and/or maximising shareholder value is very rarely if ever the motivation for owning such a business. Moreover, Government ownership and operation usually distorts the markets in which they operate and in the case of Kiwibank this distortion is of some concern: I outline this later. Look at Ports of Auckland (POA) with almost 18 years of being owned by variants of the Auckland Council. POA paid a paltry $3.7 million dividend for year to June 2021 to its sole shareholder, the Auckland Council. By way of its investment arm, the Bay of Plenty Regional Council received $45.7 million in dividends from its stake in Port of Tauranga (POT). The rest of the private shareholders in this well-run port, received a further $38.7 million in dividends the same year, taking the overall total to $84.3 million. Being answerable to an array of shareholders has spurred POT to deliver very strong outcomes not only for its shareholders but also the Bay of Plenty region and indeed New Zealand as a whole. With Kiwibank now a state-owned enterprise what is it going to mean for its financial performance and for competition with other private financial and banking services providers, which now more than ever have to compete with a competitor that will not likely be focused on the same key metrics and deliverables?
Former Sydenham MP, Jim Anderton, was behind the creation of Kiwibank. In 1989 he fell-out with the Lange / Douglas led fourth Labour Government with his being suspended, interestingly, from caucus primarily because of his disobeying leadership instructions to vote for the sale of the Bank of New Zealand. The bank was sold to and remains, at this point in time, owned by the National Australia Bank. Anderton remained in parliament in the 1990s, with his New Labour Party morphing into The Alliance Party, during which time he clearly continued to be uncomfortable with the strong position of the Australian banks here in NZ and in particular the outflow of profits to their Australian parents. Anderton and The Alliance Party formed part of the fifth Labour Government led by Helen Clark and Michael Cullen with Anderton actually being appointed Deputy Prime Minister and Minister of Economic Development. From this powerful position and, I seem to recall, against the initial wishes of both Clark and Cullen, Anderton corralled the support and votes to establish Kiwibank. The goal was to create a locally owned and locally run bank and increase competition in the domestic banking sector.
And therein lies the heart of the problem with Governments meddling in business: the Prime Minister was against it, the Minister of Finance was against it and I bet Treasury was against it too. But the Alliance Party and its leader Jim Anderton were crucial to the Labour Party being and remaining in Government. So here we have Kiwibank today, there for political and not commercial reasons, with a tiny market share of the NZ banking scene. Has it really made that much of a difference? Over the years it has partially succeeded as it has given both depositors and borrowers additional options for their money, but as at the end of March, according to RBNZ data, Kiwibank made up only around 5% of total banking sector assets compared to 89% for the big four Australians: ANZ, Westpac, BNZ and ASB.
The reason banks are not a good fit for Governments is that they are what we call capital hungry. Banks need to be large to be able to spread high fixed operating costs across its business. Insufficient scale renders the bank uncompetitive and therefore not viable. As size and scale are pursued typically for a bank by writing more loans and hopefully gaining market share the funding requirement for these assets increases commensurately. More loans / assets mean more funding which in turns means more capital. As already pointed out, after some 20 years in operation Kiwibank has a little less than 5% of total bank assets in NZ. This lack of comparable scale hinders its operating performance which undermines profitability and therefore cash generation in turn limiting return on equity and hence the ever-needed capital.
In October 2016, Kiwibank announced that it had sourced additional capital, from the New Zealand Super Fund (NZSF) and the Accident Compensation Corporation (ACC), to support the next stages of its growth. Both incoming shareholders purchased significant minority stakes (47% together) from New Zealand Post both freeing-up much needed capital for the postal service, and perhaps more importantly relieving it from the burden of future capital requirements for the fledgling bank. The Government at the time had many calls on its tax revenue, as it does at present, but funding a bank to grow was not high up the list of its priorities.
So apart from the Government changing from National-led five years ago to Labour majority now, what has changed for the Government to move to nationalise Kiwibank? Has Minister Robertson seen an investment opportunity where ACC and NZSF has not? Remember they’ve just sold for about twice their initial investment. I don’t think so. The rationale here is political in much the same way but certainly less strategically important than former Finance Minister Cullen’s purchase of KiwiRail from Australia’s Toll Holdings. It continues this Government’s centralisation philosophy but, in this case, we have a Government owned participant in a competitive market with a very small market share needing both a growth strategy as well as capital to fund it.
Back to my earlier point regarding Government ownership and operation of businesses usually distorting the markets in which they participate. For outstanding Kiwibank bondholders, which in aggregate hold approximately $3 billion in some form of Kiwibank bonds the nationalisation is great news. Their credit risk has instantaneously improved from that of an instrument with an implied Government guarantee to one which now carries the next best thing to an actual Government guarantee. We all know the Government would not default on any coupon / interest payment or capital repayment of any bonds owed by Kiwibank as what sort of message would it send? Why then would an investor buy New Zealand sovereign debt at much lower returns, when one can buy Kiwibank bonds at much higher yields with this effective Government guarantee? Hedge fund bond trading desks will be laughing all the way to the (Government guaranteed) bank arbitraging New Zealand sovereign debt and buying as many Kiwibank they can hoover up. Distortion indeed.