New Zealand has a state-owned bank. It was set up by socialists and greens as a populist and nationalistic move to counter the dominance of all our major high-street banks, all of whom just happened to be owned by Australian high street banks. The current centre-right government has continued the policy.
Kiwibank has proved very popular with what we call the "cardigan brigade"--the elderly, the welfare dependant, the average bureaucrat and state employees. But commercial reality is biting. Once it had hoovered up all those high-transaction, low balance, loss-making accounts from its competitor high-street banks--by offering higher deposit rates and lower fees--Kiwibank hit a commercial rut. To grow further, Kiwibank needed more capital. Its shareholder, the gummint refused to pony up--being itself severely cash strapped and deeply in the red.
Faced with competitive marginalisation--no growth, eroding margins, weakening profits, bad debts to be written off--Kiwibank had few places to go. The configuration of the tea-leaves in the latest mandatory General Disclosure Statement for Kiwibank portends trouble ahead.
According to Gareth Vaughan at interest.co.nz
Kiwibank's GDS also shows the bank's profit collapsed to just NZ$814,000 in the March quarter from NZ$12.2 million in the same period of last year as impairment losses on loans ballooned in the wake of the February 22 Christchurch earthquake. There was also a NZ$266.6 million drop in the bank's deposits to NZ$10.8 billion, with a NZ$444.6 million drop in wholesale deposits offsetting a NZ$178 million rise in retail deposits. . . .Kiwibank could accept its commercial fate, batten down the hatches, or it could do something radical. It appears to have chosen to believe its own marketing hype and do, you guessed it, the "radical", which Kiwibank would proudly call, "different". (Remember the TV ad campaign fronted by actor Sam Neill. Management and directors have apparently decided to get smart. Since its retail deposit growth had dried up (whilst numerous, the cardigan brigade has finite limits) it has decided to seek funding offshore. And not just anywhere offshore. The smart boys at Kiwibank decided that Europe was the way to go.
The GDS also showed a rise in Kiwibank's assets past due by more than 90 days to NZ$38.7 million at March 31 from NZ$29.6 million at June 30 last year, with impaired assets having more than doubled over the same time period to NZ$90.3 million from NZ$37.7 million.
Europe is awash with fiat money and its short term interest rates are very, very low. So Kiwibank has borrowed nearly a billion dollars in the last six months from European lenders at (low) commercial on-call rates. It has then done the unpardonable thing: it has lent its money out long. Borrowing short, and lending long. Cause of banking failure, 101. Worse still, it has chosen to borrow offshore from a region facing a credit crunch of its own which may well turn into a full-blown crisis.
All it would take is for the crisis to materialise due to a default by Greece, Spain, Portugal or Ireland and credit would dry up, short term interest rates would skyrocket, and hey presto Kiwibank will be in big trouble. We fervently hope that the bank's smart boys have covered all those Euroloans with interest rate swaps.
We would guess that the folk leading Kiwibank are not losing any sleep. After all, they run the Peoples' Bank. In the end the gummint will not let them fail. Gummint has bailed out finance companies and insurance companies. There is no doubt it will bail out its own bank. Kiwibank can therefore afford to take huge risks. And that, friends, is what economists call "moral hazard". In the end we, the dumb-ox taxpayer, will subsidise the reckless hubris of Kiwibank management.
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