Kiwibank the first to move on the new capital standards: strategic foresight or another bailout?
The state-owned bank cancels its $500m equity issuance following regulatory relief from the RBNZ.
Kiwibank's parent company, Kiwi Group Capital, has cancelled its planned $500m equity capital raise following the Reserve Bank's recent changes to capital requirements. The bank no longer needs additional equity because the revised capital settings reduce equity requirements, and Kiwibank recently completed a successful $400 million Tier 2 capital raise.
The regulatory changes create a more level playing field, addressing longstanding concerns about disproportionate impacts on smaller banks, allowing Kiwibank to maintain its above-market growth trajectory without diluting Crown ownership.
My two cents on this cancellation
The cancellation makes strategic sense, though it reveals uncomfortable truths about Kiwibank’s position. Investor feedback was reportedly positive, but let’s be clear: the $500 million equity raise was widely seen as a long shot given the risks and uncertainties involved. That it couldn’t find terms acceptable to both parties tells you something.
Instead, the bank now relies on its $400 million Tier 2 capital raise. However, this is weak capital: it is debt designed to absorb losses in gone-concern situations, basically to facilitate orderly resolution or liquidation. And, as it is debt, it will need repaying before 2033, which means that Kiwibank will be unlikely to write this capital off to absorb losses. It is for this reason that investors worldwide focus on equity capital, specifically Common Equity Tier 1 capital, which provides permanent loss absorption.
Checking the numbers
Under the newly announced capital requirements, Kiwibank holds roughly 3% excess Tier 1 capital and 4.37% excess Total capital. This represents significantly more headroom than under the 2019 capital framework. Had those rules been fully phased in today, Kiwibank would have held just 20 basis points of excess capital. Given Kiwibank’s return on equity running at roughly half its cost of equity, there was a genuine risk the bank wouldn’t reach the 2028 endpoint with adequate buffers. (Banks typically need 200-300 basis points of management buffer above minimums.)
A bailout of sorts?
A pattern emerges: the RBNZ has had Kiwibank’s interests in mind for quite some time. Major prudential decisions have consistently favoured our national champion. This latest development reinforces that the Reserve Bank remains acutely mindful of Kiwibank’s viability.
Whether this mindfulness is prudent remains an open question. Should Kiwibank face a major shock or operational risk event, the RBNZ’s supportive stance could end badly, like a friendship turned acrimonious divorce.
More fundamentally, it is troubling that the bank unable to raise equity in the market now relies on yet another regulatory “bail out”. Previous rescues came from the Crown. This time, it’s the Reserve Bank providing relief.