Any Change to Kiwibank Needs to Address Agri Lending

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We first started talking about Kiwibank being re-purposed for Agri growth (and more business lending) in this article here

Within that article we discussed Kiwibank’s success, but despite that, capital regulations were preventing them from becoming a meaningful player in Agri lending.

Quite simply, Kiwibank has a limited amount of its own equity capital, and the capital adequacy rules (i.e how much of its own equity it needs to place against each loan) means that it’s more incentivised to lend on houses than it is to an Agri or business customer.  

Now, the future of Kiwibank is again on the table after a speech by Nicola Willis, New Zealand’s Finance Minister, over the weekend. One of the ideas circling parliament at the moment is to expand Kiwibank by allowing it to seek more capital - this might be either from Government itself, or further external capital. The earlier Commerce Commission report on the banking sector actively supported the expansion of Kiwibank as a way of encouraging further competition in the New Zealand banking sector, so any move from Government is likely to be on point with this.  

The only trouble with that approach, is without any change to capital regulation, any non-specific capital introduction into Kiwibank is more than likely going to simply stimulate a further expansion in home lending credit – great for home owners getting access to competitive credit (and also for house values) - but absolutely no use whatsoever to the productive sector.

We saw a version of this during Covid – when the RBNZ introduced the LSAP programme, they provided c. $50bn to New Zealand banks as lines of additional credit. When added to the government’s own stimulus we observed a huge amount of additional liquidity landing in banks. In turn, given their capital settings favoured home lending, the banks did what they did best and fed it down that channel - leading to a significant explosion in home lending, subsequently fueling house price growth.  

If you prefer to see this more graphically, the below graph shows that bulge of new lending going through:

The second graph below shows the impact that had on house prices – you will see the corresponding bulge in values we had during the same time 

So how do we do it differently this time?

Well, this is actually quite easy.  

If you actually want Kiwibank to be a genuine capital provider in the productive sector, then the Government needs to mandate that any extra capital it provides Kiwibank, needs to be explicitly for new lending to the Agri and/or the business sectors.

Broadly applying 20% bank capital requirements for lending to Agri, this means that if the government advances $200m of new capital to Kiwbank with this specific mandate, it would lead to $1bn of new capital for Agri. 

That’s actually really material.

Left to their own devices without this mandate, this capital addition could instead be 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?

And why not make this $500m? This would then provided up to$2.5bn of new Agri Lending.   Kiwibank would then start to become a really notable player in the market.

What a great story that would be, a Kiwi owned bank supporting New Zealand farmers, who are in turn responsible for almost $60Bn of New Zealand exports, and employ’s 370,000 kiwis across regional NZ. With the government’s desire to increase exports in this sector, this would be a notable shot in the arm.

Does this solve all of the problems with capital in the sector?

We estimate the capital gap in the sector to be between $5-10bn, so even with this change, there would still need to be other capital providers.  

Also needed to include a re-look at the foreign direct investment (FDI) settings to supercharge farm revenue growth through further innovation, targeting higher value products.

But this move with Kiwibank would be a good start and a strong signal from the New Zealand Government about it’s commitment to grow New Zealand farming and New Zealand’s exports. All things that will lower our current account deficit and increase New Zealand’s prosperity.

There’s also a more radical solution with Kiwibank which would create a step change in productivity in NZ because of the capital it would unlock.

And that’s to sell it.

But don’t let the capital disappear- use the freed-up capital to lend solely into business and agriculture. 

With $2.5bn of potential equity capital coming out of a sale re-purposes into a new banking vehicle, solely for Business and Agri, this would deliver a new ability to lend a further $12bn + into New Zealand Agri and Business.  

That pivot into more agriculture and business lending would have multipliers of New Zealand GDP growth attached to it. It would also be self-perpetuating with business confidence. A strong New Zealand led message that we want to support New Zealand Business and Agri, leading to more businesses wanting to start or expand – would result in genuine incubator of New Zealand growth for the future, whether it be domestic sales or export earnings

Now, that’s a real step change.

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