The government has a very simple lever it can pull if it thinks there’s a competition problem in the New Zealand banking sector. 

Pour money into Kiwibank so it can compete more aggressively with the Australian-owned titans that dominate the nation’s banking sector. 

Sure, it would be more costly than the months and millions spent on a Commerce Commission market study that will pore over every bank statement and unearth various practices that could (and should) be done better. 

But it will also have an immediate effect in a similar fashion to when the emergence of Kiwibank tellers across the then-nationwide network of NZ Post shops slowed the inevitable retreat of bank branches in less economically rational locations. 

Those branch numbers have been purged over the past 20 years as online banking replaced physical and phone banking, but it was always harder to withdraw entirely when there was a holdout with a slightly different purpose.

Over the past decade, Kiwibank has done a sterling job of making itself part of the firmament, more than doubling its total assets to $33.37 billion at the end of December from $14.93b at the end of 2012. 

That’s a faster pace than the big four, but still pales in comparison to the likes of ANZ Bank NZ’s $195.6b, up from $127.37b; Bank of New Zealand’s $130.24b, up from $72.95b; ASB Bank’s $124.48b, up from $68.5b; or Westpac NZ’s $122.36b, up from $77.2b.

Butterfly effect

As the bank’s architect Jim Anderton noted when welcoming its establishment board back in 2001, it only needed 100,000 customers and 5% of the banking market to force the majors to lift their game. 

Kiwibank has about 5.1% of the $653.2b of total assets, compared with 3.7% of the $395.92b at the end of 2012. 

Little wonder that its net interest margin of 2.5% is in line with the Aussies, whereas the 1.8% it operated at a decade ago was skinnier than the 2.2% average of the time. 

The state-owned lender is currently raising $200 million through the sale of subordinated notes which will bolster its tier 2 capital, adding to its $2.31b of total capital. 

Kiwibank’s tier 1 common equity capital was $1.79b at the end of December, a ratio to risk-weighted assets of 10.4%, lagging behind the big four. 

The lender needs to expand that capital if it wants to boost its lending. 

Herein lies the nub of unleashing the government’s bank. 

Cabinet chose not to go ahead with the NZ Superannuation Fund’s plan to bring on a minority investor once the bank’s transformation plan was completed, saying the fund manager could test the waters provided any junior partner was OK with the government keeping a majority stake, either directly or indirectly. 

After consultation, the Super Fund obviously walked away from the Clayton’s choice, letting the government press ahead with its goal of buying the stakes from the Super Fund, ACC and NZ Post (which had the added advantage of not having to pay a premium to retain control if and when the Super Fund exited). 

The problem is, after the $2.1b roundabout, Kiwibank is still undercapitalised if it’s to be the disruptor of the sector and a genuine competitor among its much larger rivals. 

That was the goal of the Super Fund and endorsed by the government, but without the right level of funding it’s nothing but a pipedream. 

Not that special

Kiwibank’s special one-year mortgage rate of 6.65% is a run of the mill offering and its six-month term deposit of 5.35% for deposits of between $5,000 and $10,000 is much of a muchness. 

That’s hardly the disrupting competitor envisaged by Jim Anderton or even finance minister Grant Robertson’s tepid support for the bank to grow without directly answering whether he’d be willing to pump in more capital. 

That’s obviously been heard loud and clear at Kiwibank’s headquarters, when chief executive Steve Jurkovich told reporters last year the plan to meet increased capital requirements was through retained earnings rather than shaking the begging bowl at its shareholder. 

That’s simply not good enough if the growth aspirations are real. 

Kiwibank’s retained $1.15b of earnings over the years and had $737m of share capital tipped in by its owners. 

That’s seen it able to grow its total assets at an average annual pace of 12.3% over the past decade, outpacing the 6.5% average annual pace of the entire system, but barely making a dent in the dominance of the majors. 

Traditional banking is already fending off the growing tide of fintech and the prospect of open banking undermining its grip on typically inert customers, but legacy institutions have a tendency to take much longer to die than people think and if Kiwibank wants to cement it, will need the tools to do so. 

If the government wants that to happen, it can either pony up itself, or – shock, horror – try selling a minority stake on the New Zealand stock exchange to raise new equity for the bank. 

Either way, the challenger better hurry up, otherwise it might find itself disrupted.