Kiwibank purchase of an Aussie competitor would be good news for New Zealand

Thursday, 9 January 2020

With the BNZ, Kiwibank would have instant scale, and access to capital to properly compete.

OPINION: It is now heavily rumoured that negotiations are under way for Kiwibank to buy the Bank of New Zealand (BNZ).

The fact that it might happens says a lot about the current state of Aussie banks. The result could be very good for Kiwibank, and for New Zealand.

The fact that a sale is even rumoured says a lot about the pressure Australian banks have back home to get their houses in order. A few years ago it would have been unthinkable for an Australian bank to sell its New Zealand arm. They have, for decades, been the crown jewels of profitability for their Australian parents.

Profits from the average New Zealand client have consistently been 20 per cent higher than their Australian equivalent.

* Sorry, Kiwibank: It's not enough to be Kiwi, you also need to be good

* Big banks' rural lending threats are just bluff and diversion**

The Aussie banks have been under pressure from multiple fronts. The Australian Royal Commission has exposed poor practices at home, which need (expensive) fixing. The Reserve Bank here is requiring them to have more capital for a rainy day, and the banks all have indigestion from over lending to our rural sector.

Sam Stubbs: 'The Aussie banks have been under pressure from multiple fronts.'

Over-lending is perhaps the most challenging short-term problem for the banks. Rumours are swirling about large rural loan books being offered at substantial discounts, in order to restore a balance to banks' lending mix. This indigestion from rural lending will play poorly in their Australia headquarters and, on top of bigger capital requirements, may just be the straw that breaks the camels back for NAB, the owner of the BNZ.

While the withdrawal of any major bank is a cloud of concern, there is a significant silver lining for New Zealand if Kiwibank steps up and buys the BNZ. To understand why the future could be better, we need to understand a little history.

Banking in New Zealand and Australia is extremely profitable because it's dominated by four large banks. This is a very small number of big competitors for such a large combined market. The history of why there are so few big banks is for another time, but suffice it to say it's a structure that has suited the Australian and New Zealand governments and banks alike for decades. It has led to stable, but very expensive, banking services.

The Royal Commission into banking in Australia has now exposed many banking practices which have been bad for consumers. It's been the 'emperor's new clothes' moment for an industry wallowing in the hubris and entitlement that grew over many decades.

In New Zealand, setting up Kiwibank was supposed to break apart this cosy bankers' club. It was a great idea, but sadly it has achieved exactly the opposite. It was always undercapitalised, with the burdens of its parent, the Post Office, choking its growth. The mere existence of Kiwibank has given the big four Aussie banks the perfect excuse to maximise profits. They could say to politicians and regulators, with hand on heart, that they were competing with a Government-owned bank, so it was a fair fight commercially. The reality is, Kiwibank was a one-armed boxer in the ring with four heavyweights. It could never compete in a way that got fees and lending rates down, and deposit rates up.

Eighteen years after it was launched, Kiwibank still has less than 5 per cent market share, with the big players making massive profits from ordinary New Zealanders. In its current form, Kiwibank simply isn't working as intended. By perpetuating the profits of the Aussie banks in New Zealand, Kiwibank has achieved exactly the opposite of its stated purpose. It's a great group of people, trapped in a horrible business model.

But with the BNZ, Kiwibank would have instant scale, and access to capital to properly compete. The Government, as 51 per cent owner, and NZ Super and the ACC as 49 per cent owners, can fund the deal. And KiwiSaver managers like ourselves would love to fund it, too. And wouldn't it be good to see Kiwibank's profits all stay in New Zealand?

Bank mergers aren't easy. There are different cultures within the BNZ and Kiwibank, and it takes time. But the same problems existed when the National Bank merged with the ANZ. This will get sorted out.

A deal is also good news for rural New Zealand. Kiwibank rural lending likely to be more stable that that of the Aussie banks. The big Aussie banks have been fairweather friends, over-lending for dairy conversions when it looked good and cutting off credit when it doesn't. The rural sector is right to be angry, because many of these decisions are made in Sydney and Melbourne, far away from the reality of the farm gate.

Farmers need reliable credit, not necessarily the most credit in good times. A Kiwibank rural portfolio is likely to be a longer term, better managed book of business, because rural lending will simply matter more to Kiwibank than it does to the BNZ's masters in Melbourne. Rural towns with Kiwibank or BNZ branches will likely see them stay longer too, because the combined entity will have scale, and will be New Zealand-owned. Australian-owned banks care much less about closing a branch in New Zealand than in their own country. Kiwibank will be more sensitive to closing branches in its home country, too.

And there is something appealing to me about a local owned heavyweight in banking. It should be allowed to make reliable profits, but be big enough to keep the extractive profits of the Aussie owned banks in check.

If it's for sale, Kiwibank should buy the BNZ, because ordinary New Zealanders will win.

Sam Stubbs is founder of KiwiSaver provider Simplicity.