MAX HAYTON. Kiwibank – lessons for Australia.

It’s not unusual for big banks to be accused of greed, unfairness, poor service and corruption. The answer often proposed is to create a government owned bank. This has been suggested as a solution in Australia. New Zealand has already built one, but its experience shows public ownership doesn’t necessarily fix all the problems.  

For decades New Zealanders felt poorly served by the few big banks that dominated their banking, with the extra frisson that the banks were mostly foreign owned and the biggest were based in Australia.

Antipathy to the Four Big Aussies that dominate the New Zealand banking scene led eventually to the establishment of the government owned Kiwibank.

It’s often stated that each year the ANZ, ASB, BNZ and Westpac rake off billions of dollars in fees and profits and ship them to their well remunerated head office back home in Australia.

In fact their profits are about normal for their size, about NZ$4.5 billion (AUD4.1 billion) a year between them, but for critics the point is that it’s mostly shipped home to shareholders in Australia. There are also the usual complaints about high fees, low interest on deposits and unfair penalties for common customer errors like bounced cheques and accidental unauthorised overdraft.

THE ORIGINS OF KIWIBANK

The formation of a government owned bank was part of the policy manifesto of a small left of centre party the Alliance, formed by long serving Labour MP Jim Anderton who was appalled at the neo-liberal economic “reforms” of the Labour government of the 1980s. The Fourth Labour Government of 1984-1990 enacted economic changes at the extreme end of the scale, including tax reforms, the sale of state assets and deregulation of banks. New Zealanders knew the reforms as Rogernomics (Roger Douglas was the crusading Finance Minister). Others knew similar policies elsewhere as Thatcherism and Reaganomics.

For years Jim Anderton campaigned for a state owned bank until, at a cabinet meeting in 2002, his persistence finally wore down his colleagues. One said to the Finance Minister Michael Cullen “Michael, Jim has beaten back every argument we’ve put up against the bank. For God’s sake give him the bloody bank.” Cullen replied “Oh, all right then.”

In this way the Labour government launched a state owned bank as part of the reaction against the Rogernomics that unleashed the markets and the banks and caused considerable social disruption.

The origins of the bank also lie in New Zealand’s General Election voting system, the Mixed Member Proportional or MMP system. It gives small parties the possibility of holding the balance of power and of becoming coalition partners with the major parties. There is always a price and Kiwibank was part of Jim Anderton’s charge for voting with Helen Clark’s Fifth Labour Government.

These same motives and mechanics don’t operate in Australia where the calls for a government owned bank are based on allegations of collusion and corruption among the dominant banks.

Establishing the bank as part of New Zealand Post provided the infrastructure to quickly form a network of branches. Kiwibank launched in 2002 with 211 branches. By 2004 it had 301. Walk into a New Zealand Post Shop and you walk into a bank.

Kiwibank’s core business consists of personal banking, business banking, retirement saving and other wealth services. There is no instruction for Kiwibank to favour small businesses or other particular sectors.

PERFORMANCE

The bank’s latest Annual Report shows a profit of NZ$124 million (AUD114 million). Its assets are valued at nearly NZ$20 billion (AUD18.5 billion) and Kiwibank accounts for 12 percent of New Zealand’s banking transactions.

Surveys show customer satisfaction is high, but the service Kiwibank provides isn’t very different from other main banks.

The Canstar company’s star rating of transaction account rates and fees current in June 2016 awards the highest ranking five stars to a Kiwibank account but it also gives five stars to accounts offered by ANZ and Westpac. On this measure there appears to be no clear advantage for Kiwibank customers.

In fact some of its customers think Kiwibank has ripped them off, and when they prepared to sue over what they considered to be unfair penalty fees the bank quietly settled, the details kept confidential. The group “Fair Play on Fees” planned to sue Kiwibank over its fees for bounced cheques and unapproved overdrafts. Lawyers leading the class action said their clients commonly joined Kiwibank because they were frustrated with the way they were being treated by the Australian-owned banks, but they were then bitterly disappointed to find they were treated no differently by the government owned bank.

Over seven thousand Kiwibank clients joined the class action. The legal team also planned suits against ANZ and Westpac. The ANZ case was later also dropped and the details were kept confidential. The lawyers organising the class action were quoted earlier this month saying legal action continues against Westpac and the BNZ.

MORTGAGE RATES

Kiwibank is not a dedicated follower of the Official Cash rate. In August last year there was a clamour for the trading banks to pass on in full the 25 point cut in the OCR.

The ANZ, Westpac and ASB all passed on 5-10 points, but they also announced jumps of up to half a percent in their short term deposit interest rates.

Kiwibank came close to following the OCR down, but stopped short and cut only 20 points off its variable home loan rate.

In general, homeowners with a mortgage gain a slight advantage at Kiwibank compared to the big four. Its standard variable floating rate is currently 5.55 percent. Westpac’s is 5.75, ANZ is 5.79, ASB is 5.8 and BNZ is 5.9 percent.

Oddly, mortgage interest rates have been rising while the OCR has edged down to reach the record low of 1.75 in November last year. Contrary to this trend, in the last six months nearly all mortgage interest rates in New Zealand have edged up.

Nor does Kiwibank offer the lowest mortgage rates in the country: Over a range of mortgage terms the lowest rates are offered by HSBC, Westpac and Resimac (a mortgage lender, not a bank).

TERM DEPOSIT RATES

Investors can gain a slight advantage by using Kiwibank, but only by a few points. As an example, for ten thousand NZ dollars invested over five years Kiwibank offers 4.3 percent paid on maturity. Westpac offers 4.1 percent paid at maturity. Better terms are possible from ANZ on 4.2 percent, and ASB and BNZ on 4.25 percent.

On this evidence Kiwibank is just like other banks offering similar interest rates, fees and services to the New Zealand market.

The major differences between Kiwibank and the Big Four are that Kiwibank’s profits stay in New Zealand, kiwis can have a warm tingly feeling that they own their own bank and finally after thirteen years in business Kiwibank started paying dividends to the government.

STRUCTURAL CHANGES

In March 2015 Kiwibank paid its first dividend to the government of NZ$21 million (AUD19 million).

NZ Post then set about selling 47 percent of its best performing asset to two other major investors on the New Zealand scene, the Accident Compensation Corporation and the NZ Superannuation Fund. (The first of these has a large fund paid for by workers, employers and motorists to compensate any New Zealander who has an accident so no-one can sue for injury, and the Super Fund actively invests to provide funds for future pensions).

After the sale Kiwibank remained a hundred percent New Zealand owned, NZ Post flushed out over NZ$200 million (AUD184.5 million) to invest in itself and to pay down debt, about $90 million (AUD83 million) to invest in Kiwibank and about NZ$200 million (AUD184.5 million) was a special dividend for the New Zealand Government.

After the sale S&P downgraded Kiwibank’s issuer credit rating from A+ to A because NZ Post withdrew a guarantee. S&P said however the current rating reflects its assessment that the bank is highly likely to receive extraordinary support from the New Zealand government if it’s needed.

Sentiment for the notion of government ownership and a largely false expectation of a better deal for bank customers continue to drive support for the bank. Kiwibank has over a million customers among the country’s population of just under 4.5 million people, and about 420,000 consider it their main bank.

The government owned bank in New Zealand fails if anyone expected a paradise of low fees, cheap mortgages and high interest for investors, but it remains a source of tax income and the occasional source of windfall dividends for the government.

If a government owned bank in Australia performed in a similar way to Kiwibank its customers would see fees and interest at roughly the going rates but with the bonus of knowing that their government could bag some big bucks in dividends and of course they would have that warm tingly feeling from knowing they own their own bank.

Max Hayton is a New Zealand journalist with parliamentary and international experience. 

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2 Responses to MAX HAYTON. Kiwibank – lessons for Australia.

  1. Tim Colebatch says:

    Max, you have compared the banks on two measures, which show that Kiwibank pays slightly higher interest rates than the big four to its depositors while charging noticeably lower rates on home mortgages. (On a $500,000 mortgage, its rates equate to annual savings for borrowers of between $1000 and $1750 compared to what the big banks are charging.) Is that typical across the range of bank deposit and lending rates? If it is, it would appear to be a more user-friendly bank than its rivals, as Jim Anderton intended. I’m puzzled as to why you downplay this as having no significance. It’s not just a matter of having a “warm, tingly feeling” of ownership. It’s about having a bank that offers a different balance of values between the respective interests of customers and shareholders.

  2. Cyril says:

    As Tim Colebatch has rightly pointed out a thousand dollars is a significant amount. I add my voice to his and am equally puzzled as why you underplayed its significance. Perhaps it is because you believe a thousand dollars is an insignificant amount in which case I would like to read about your road to riches. Maybe you could spare time to guide us through the maze of alternative schemes to financial wealth that you have apprently successfully travelled.

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