How a Kiwibank sale might work

Any potential sale of Kiwibank will have to be managed carefully to ensure it creates the potential for real growth for the bank, industry commentators say.

Finance Minister Nicola Willis added fuel to speculation that the government is planning a sale of the bank, when she spoke at the National Party conference at the weekend.

She said all options needed to be on the table to improve the sectors' competitiveness.

"The recent Commerce Commission study into New Zealand's banking sector makes it crystal clear: disruptive forces are needed to drive change," she said.

"No more cosy oligopoly. Instead we need more mavericks, open banking technology, more transparent choices for customers. For example, I would like to see Kiwibank grow. I would like it to become a disruptive competitor that takes on the big Australian-owned banks.

"It can't do that without extra capital, and I am interested in exploring where that capital might come from. Lots of KiwiSaver funds, New Zealand investment funds and New Zealanders themselves are looking for homegrown places to put their money and invest in New Zealand's future. And we have to strengthen banking competition."

Simplicity provider Sam Stubbs said banking was a high-margin industry and should appeal to a range of investors.

He said unless a foreign bank entered the market, Kiwibank was the only possible "scale disruptor" over the next five or 10 years.

"A lot of people think banking's got to do with tech - it doesn't, it's to do with balance sheets. If you want to compete, [you] have to have financial muscle - that means a lot of shareholder capital.

"In theory, people like ourselves should be very interested once they look at bank margins, return on equity and so on. That's $200 billion of KiwiSaver funds and other funds that KiwiSaver managers manage. Then there's iwi, they should be pretty interested in it because it's long-term, domestic, it's infrastructural.

"Then private investors as well… you're probably looking at the amount of money that Kiwibank would be worth if a minority stake was sold being significantly less than 1 percent of the addressable New Zealand capital to invest in it."

But he said the bank was arguably not quite ready to be listed.

"It has to go through a core banking system upgrade and get ready to handle a whole lot more external capital and to be run more commercially. It's had a government-mandated board and has done some clever things… but it has been slow on the uptake in terms of new tech and failed in the past in upgrading its core banking system. Arguably it needs to get itself ready to be an aggressive competitor and needs to go through some final internal preparation for this.

"There may be an argument for a staged introduction where a minority stake is sold on the private market to interested parties as a precursor to listing. That would bring a commercial board and bring in shareholder discipline."

He said it should be a matter of doing it right, not quickly. "If we have to wait a year or two to get ready to compete, I'd much rather do that than jump into a listing and have it fail."

He said KiwiSaver funds had a lack of things to invest in, and 65 percent of money was going offshore.

"It could be a big listing. If it got to the point where it was an index stock, every KiwiSaver fund would own it by default."

Dean Anderson, founder of KiwiSaver provider Kernel, said the market capitalisation of the NZX had gone nowhere for five years.

"Overall, the New Zealand market and Kiwi investors have historically favoured high dividend-paying, blue-chip companies, driven by our imputation credit regime. A company like Kiwibank would likely have broad appeal from the market, including KiwiSaver investors.

"The recent Infratil placement and retail offer, which was significantly oversubscribed, shows despite the lack-lustre activity in our market, there is still appetite and capital for large and attractive investments. The attractiveness of any IPO is in the detail. But as we saw with the energy company listings, such a large IPO can create significant interest in our local capital market, engage large number of investors, and prove beneficial to the entities, investors and the market over time."

Banking expert Claire Matthews said she was on the fence about whether a sale was appropriate.

"If [the government] sold part and retained a majority share so it had control, that would be a preferable way to go… the reality is they are going to struggle to find an investor. One option is to go to the public and give New Zealanders the opportunity to own a share of the people's bank."

But she said that could also limit the banks' ability to get new capital.

"If they've got a new partner that could potentially invest additional capital if the bank needs it, the public aren't going to be able to do that. Public investment is only via any sale."

She said for Kiwibank to make a real difference it would have to grow to a "huge" extent and have more capital.

"At the same time you can't grow from where it is to where it needs to be to make a difference overnight - to persuade people to suddenly transfer banking and borrowing to Kiwibank you would have to offer significantly better rates but the resource, the cash they're using to make those loans they're fundamentally paying the same rate on as the other banks. It's hard to see how they can make a real difference."