Fighting the Aussie invasion

By ROELAND VAN DEN BERGH - The Dominion Post

A little over seven years since opening its first branch in Palmerston North and $83 million in taxpayer funding, state-owned Kiwibank has grown from an absolute minnow to being on the cusp of promotion to the premier league.

On every front, the rise of the "people's bank" has far exceeded expectations.

Acting chief executive Paul Brock, a founding member of the start-up team, says Kiwibank is twice as big today than it was forecast to be in the original business plan, on all measures.

Kiwibank has attracted 650,000 customers and total assets stand at nearly $10 billion, including a loan book of $7.7b. Last year the bank reported a tax-paid profit of $36.8m.

KPMG banking expert Godfrey Boyce says those numbers make Kiwibank the country's fifth biggest bank with the ability to compete directly despite its single- digit market share.

"And it has changed the competitive landscape."

That success has caught the attention of Australians, prompting calls by some economists across the Tasman for the federal government to set up a people's bank to keep their own banks at bay.

Throwing fuel on the fire, Kiwibank executives say their model could work across the ditch.

Kiwibank was the brainchild of former Alliance party leader Jim Anderton, who championed a public mood sick of rising fees, branch closures and poor service.

A highly patriotic and controversial advertising campaign underpins the original mission for a New Zealand-owned bank that would look after ordinary New Zealanders and keep profits in New Zealand.

Its current advertisements which pit World War II-style resistance fighters, led by a feisty heroine, against black-suited Australian bank invaders have been labelled "reprehensible and outrageous" by former Bank of New Zealand chairman Kerry McDonald. BNZ is owned by National Australia Bank.

For New Zealand Post, faced with falling letter volumes, subsidiary Kiwibank was an opportunity to build a new business using its existing branch network.

Mr Brock says Kiwibank sought to re-establish a second-tier bank. Other second-level banks had been gobbled up by the big banks in the 1980s and 1990s.

Community-based Trust Bank was taken over by Westpac, Countrywide went to National Bank and Kiwibank's forerunner Post Bank was sold by the government to ANZ.

Those mergers removed the "challenger" banks that competed against the big banks and kept them honest, Mr Brock says.

Kiwibank entered the market with the promise of halving fees on average, and beating the floating mortgage interest rates by about 50 basis points.

The competitive response from the main banks means the promise on fees is no longer always valid, but Kiwibank's current floating rate of 5.99 per cent undercuts the big four by between 40 and 50 basis points.

KPMG's Mr Boyce credits Kiwibank with bringing down the overall cost of banking for consumers. "It has been a key catalyst in terms of the pricing behaviour and the pressure on interest margins, particularly in terms of lending rates."

Kiwibank was the only bank to challenge and undercut BNZ's high profile "unbeatable" two-year fixed mortgage rate at the height of the mortgage price war a few years ago.

Consumer New Zealand finance specialist Susan Guthrie says Kiwibank has improved consumer understanding of the need to shop around for the best banking deals by taking a closer look at fees and asking questions about interest rates. The global economic crisis, bank failures and the collapse of the finance company sector has worked in favour of Kiwibank and fellow challenger TSB Bank.

Kiwibank probably also benefited from being state-owned, before the government deposit guarantee scheme came into effect, Ms Guthrie says.

"People who were anxious found somewhere they could put their money and relax."

Both banks fund their lending almost entirely from domestic retail deposits, while the big banks have been hamstrung by their need to borrow on the international money markets, which have been frozen.

"That reliance on retail has been a virtue for both Kiwibank and TSB over the last 18 months that has enabled them to maintain a pricing advantage based on their cost of funds."

It also allowed Kiwibank to sell more mortgages than any other bank in the six months to March.

However, as the bank grows its balance sheet beyond $10b it will have to increasingly diversify its funding to include international wholesale lending to maintain its growth.

Additional capital injections and retained earnings to support Kiwibank's rapid growth is expected to have pushed the taxpayer's stake to $290m, including $20m in the last year.

The Government has discussed expanding Kiwibank amid calls for it to beef up the state-owned bank to help push interest rates lower.

Finance Minister Bill English confirmed this month that "preliminary discussions have been held about the next phase of Kiwibank's growth that's as far as it's gone at this stage".

Analysts have pointed to Kiwibank's influence last year, when it aggressively lowered interest rates after cuts to the official interest rate by the Reserve Bank.

Mr Brock says the bank should be self-funding within the next two years, but the exact timing will depend on how aggressively it continues to grow.

It is a balance between becoming self-sustaining and building value for taxpayers as shareholders, he says.

Concerns that Kiwibank would become a bank for the poor, picking up the low-value customers cast off by its competitors, have proven unfounded.

More than a quarter of Kiwibank's new customers moving all their banking across are from higher income brackets, according to market research company Roy Morgan. Many are attracted by market leading floating mortgage interest rates as their fixed term rates come up for renewal.

Mr Brock says the bank's brand reputation has built over the past seven years. "We are starting to prove ourselves in the market."

Last month Kiwibank was named New Zealand's most trusted bank brand by Reader's Digest magazine for the third year in a row, and three Cannex trophies for consistently providing the best rates and lowest fees hold pride of place in the trophy cabinet.

Businesses are also increasingly joining the resistance movement.

The Manufacturers and Exporters Association has called on Kiwibank to expand its business services after its members expressed "clear and deep dissatisfaction" with the way they were being treated by the big banks.

A survey by the association found overwhelming support for an inquiry into the financial sector and its impact on the economy.

"Part of this discussion should involve a debate on the role that Kiwibank might play in driving competition in the mainly foreign-owned banking sector," association chief executive John Walley says.

Mr Brock says the bank is growing its business banking "at a steady clip" but is being specific about which segments to target as part of a measured growth strategy.

"It would be fair to say though, that a lot of our business customers have loans secured against residential homes."

Mr Boyce doubts the Government will contemplate selling Kiwibank in the next five years at least.

Given Kiwibank's success in improving competition, "why as a government would you think about taking that out of the mix?"