With Grant Robertson’s announcement today that Kiwibank will be acquired for $2.1 billion from its state-owned shareholders, it is clear that the government hasn’t learned much about banking since the global financial crisis.
Despite Robertson’s cynical spin about establishing a bank that is fully Kiwi-owned, one that keeps all profits in New Zealand, and will return to business as usual, today’s decision was a plain-vanilla bailout. If a finance minister mentions that he is prepared to put capital into Kiwibank if required, then that tells you that this bank is government guaranteed. Kiwibank will be recapitalized when it needs more capital. How is this not a bailout?
The government bailed out Kiwibank because it is stuck in a rut. Profits are pallid. Return on Equity of Kiwibank is about half that of the Big Four (ANZ, ASB, BNZ, Westpac). The same holds for its Return on Assets. Kiwibank is also a small bank, which makes it hard to compete and grow.
Moreover, since 2018, Kiwibank’s capital ratios have declined, while capital for all other banks has increased. See the graph below, which compares Kiwibank’s CET1 ratios to those of similar-sized peers:
It is also important to note that Kiwibank is de facto a too-big-to-fail bank, as its failure would not only embarrass the government, but also have an adverse impact on financial stability.
Painted itself into a corner
The toxic mix of ever weakening capital ratios, low profitability, and limited growth options poses serious problems for Kiwibank. In the absence of government support, Kiwibank would have faced certain failure. As a result of the government ruling out the sale of the bank, things are not getting any better.
Few options to survive
Until yesterday, there were two straws that Kiwibank could grasp. The first was de-risking. This is a tactic that banks deploy to meet higher capital requirements: shrink the denominators of the capital ratios. In a way, this is cheating because a de-risking bank shrinks its business by selling its most profitable assets.
The second option was to become riskier, which the government chose. However, increased risk appetite does not lead to immediate benefits. In the short-term, the increased level of risk results in lower capital ratios. But Grant Robertson made this problem much more palatable by offering taxpayers money to recapitalize the bank.
“All profits will remain in New Zealand”
The government justifies the bailout on the grounds that all of Kiwibank’s profits will remain in New Zealand. This is an almost cynical promise. It’s not like there are many profits to begin with. The profit this year was $136 million. That is about $25 per New Zealander. Wow! Compare that to the profits made by the Big Four. ANZ bank New Zealand, for example, reported a profit of almost $2 billion for the year ending September 2021. The combined profit of the big banks, by March of this year, was about $6 billion, or $1,200 per capita. Now we are talking.
Moreover, the narrative that profits leave New Zealand and disappear in some black hole across the Tasman is just wrong. Profits go to shareholders. In the case of Kiwibank the profits go to the Crown, not you. However, if you (or your Kiwisaver provider) own shares in the Big Four, you will receive a slice of their (much bigger) profits.
Adding to the cynicism of this promise is the fact that Grant Robertson has pledged your income to fund ailing Kiwibank.
“Business as usual”
Again, another cynical statement from Robertson. Kiwibank has been regarded as the sick bank of New Zealand for some years now. Business as usual means continued low profits, lower capital ratios, and no meaningful growth. It would lead to the bank’s demise.
Will it work?
The way forward for Kiwibank now is to increase its risk-appetite and start lending to riskier clients. For example, to small and medium-sized firms. But in the current economic climate this is challenging. The housing market is cooling, credit risk will increase, and some first-time buyers may suffer from the perils of negative equity.
Then there is credibility and reputation. For example, Kiwibank’s management, under the watchful eyes of the supervisor, has made no meaningful efforts to increase capital since 2018, knowing that capital requirements would increase. Why were no efforts made, and why would this change from today going forward? The same holds for profitability. Kiwibank has not shown spectacular profits for many years. Last June’s reported profits were only marginally higher than the year before. Why would that change?
It is not unlikely that the government will lean on Kiwibank to relax lending standards for political reasons, much the way the Clinton administration used the Community Reinvestment Act to promote lending back in the nineties. In 1999, Clinton boasted that “[CRA] was pretty well moribund until we took office. Over 95 percent of the community investment…made in the 22 years of that law have been made in the six and a half years that I’ve been in office.”*
I guess we all know how President Clintons efforts to make homes affordable ended. It is sad to see that our government appears to have learned nothing from the Global Financial Crisis.
*Calomiris and Haber (2014) Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton University Press.