The government says it is too soon to say whether it will push Kiwibank to use funds from a possible partial privatisation to shake-up competition in the rural lending market.
Finance Minister Nicola Willis recently floated the idea of giving the green light to the state-owned bank to raise new capital from outside investors to boost its lending capacity.
Earlier Willis wrote to Parliament’s Primary Production Select Committee, asking it to investigate competition in the rural banking market as part of a wider inquiry into banking competition.
That’s led to speculation that the government is giving serious thought to directing a recapitalised Kiwibank to make a bigger splash in the rural lending market.
However, a spokesperson for Willis said she is still taking advice on how to go about recapitalising the bank and it is too early to say where any proceeds would be deployed.
“Growing the rural economy is critical to rebuilding New Zealand’s economy and with farmers’ satisfaction with banking services dropping in recent years, it’s critical we better understand the role of bank competition in that sector,” the spokesperson said.
“That’s why we have requested a select committee inquiry into banking competition, and why we are considering options to recapitalise Kiwibank so it can grow and compete with the big four Aussie banks.”
According to Reserve Bank data, ANZ, BNZ, ASB and Westpac, alongside Dutch-owned Rabobank, account for 95% of the $63 billion rural lending market. Kiwibank, with agricultural loans of just $23 million, is a minor player at best.
One fund manager has estimated an enterprise value of roughly $2bn should Kiwibank list on the NZX.
Banking academic Claire Matthews of Massey University said assuming the privatisation is achieved through issuance of new shares, as opposed to a part sale with the government pocketing the proceeds, up to a billion dollars of new capital could be available to the bank.
This assumes the government retains a controlling 51% stake in the bank as it did with its partial privatisation of the electricity generators a decade ago.
Assuming Kiwibank pro-rated its new capital according to agriculture’s total share of private debt in NZ, Matthews estimated $200m of capital could be freed up – enough to support a billion dollars of new lending to the rural sector.
Exactly how much capital would be allocated would depend on the bank’s shareholders and their appetite for riskier rural lending.
“If you have got the public buying it then they might not really care so long as they can see Kiwibank is making a difference to NZ, but a corporate investor may be more interested in their return or the growth in their asset value and how rural lending may contribute to that,” Matthews said.
Asked how big an impact a billion dollars of new credit would have in the $63bn rural lending market, Matthews said that depended on what segment of the market Kiwibank targeted.
“If you are talking about large agribusiness loans then you are talking about multi-millions per loan and that amount wouldn’t go very far at all.
“But if you are talking about smaller rural loans that might be where they could make a real difference.”
However, director of agricultural debt advisory firm NZAB Andrew Laming said in a note to clients that Reserve Bank rules mean there are no guarantees any new capital would find its way to the rural market.
Higher capital requirements for rural loans mean banks have tended to allocate their capital to more profitable residential mortgages, which require less capital.
To offset that, Laming said, the government should make any new capital-raising by Kiwibank conditional on at least $200m of that capital being used to back rural loans.
“Left to their own devices without this mandate, this capital addition could be instead converted to $2bn of new lending into housing – great for home lending competition and house values, but do we really need more competition in that sector?”
Laming estimated the rural banking market is operating with a $5bn-$10bn capital shortfall.
More players are needed to provide adequate competition.
“But this move with Kiwibank would be a good start and a strong signal from the government about its commitment to grow NZ farming and exports.”
