Kiwibank's hidden subsidy masks massive losses

By Shoeshine

Friday 8th October 2004

Shoeshine enjoyed the theme of this year's annual report from New Zealand Post. The catchphrase is "More than meets the eye." The cover shows a barechested surfie shading his eyes and checking out the waves, carrying an ironing board under his arm.

The theme is continued on the page two seaside shot, which shows a picnic of bread, sausages and salad laid out on the same ironing board.

As Shoeshine ploughed on through the report, however, NZ Post's catchphrase seemed more than a little ironic.

The irony would only have been immediately apparent to those who had had the benefit of previously reading the annual report of the postie's banking subsidiary, Kiwibank.

Kiwibank reported a June-year loss of $490,000, down from $8 million in 2003. This performance was a year ahead of schedule, NZ Post crowed.

Kiwibank chief executive Sam Knowles hinted the bank would report a profit in the first half.

"Now we are operating profitably we will be making a positive announcement in our result for the next six months," he reckoned.

This seems jolly encouraging for the taxpayers and the postal services consumers who feared they'd be subsidising a banking turkey for years to come, if not forever.

But is it?

Delving a little further into Kiwibank's financials shows the bank isn't quite the unqualified success its publicity would have us believe.

For the last financial year, interest income was $65.2 million and interest expense $42.8 million, leaving net interest income of $22.4 million.

This modest flow is swelled by "other operating income" of $58.8 million. What might that be?

Note 3 to the statements shows it's made up of $20.6 million of banking and lending fee revenue the fees Kiwibank charges its customers and $38.2 million of "agency services fee revenue."

This is elaborated on in note 13 to NZ Post's financials, which explains "agency services fee revenue and expenditure are accounted for under a management agreement whereby Kiwibank manages the agency activity of the parent [NZ Post]."

In other words, this is an income stream gifted to Kiwibank by its generous parent.

In essence it's the facility for NZ Post or Kiwibank customers to pay bills or transmit money at NZ Post shops. It's one that seems to be growing rapidly.

From a single contract in 1993, the report boasts, there are now 84 agency agreements with outfits such as the Land Transport Safety Authority and Western Union.

Shoeshine can see nothing in itself amiss about NZ Post gifting its offspring a little revenue.

In fact it could be argued agency services are banking, not postal services, and belong more naturally with Kiwibank.

But it does beg the question of how many years more of losses Kiwibank might have chalked up had it not been transferred revenue that would otherwise have been enjoyed by its parent.

Shoeshine suspects the expenditure offsetting the revenue doesn't come to much.

The bank explains that this is made up of personnel, property, IT support, marketing and other administration expenses. But Kiwibank would incur these whether it had the agency business or not.

Taking out all the agency revenue but leaving costs as they are would widen Kiwibank's loss to nearly $40 million.

Coincidentally, that is the amount of new equity NZ Post [the taxpayer] pumped into Kiwibank last year.

Joe Blow postal services consumer hasn't fared too well either. The state-owned postal near-monopoly bumped up the standard domestic stamp price in April by 5c to 45c.

It was then unseemly enough to bray in the September profit announcement of "the biggest yearly [profit] growth since 1994."

But at least it paid the government a $22 million dividend.

Kiwibank's next act is a move into business banking, which will upset nobody as only the big Aussie banks and muscular niche players like Rabobank operate in that market.

Taxpayer subsidies for Kiwibank's retail banking activities won't bother the big Aussies much, either. Shoeshine suspects the 253,000 customer base it has attracted has a strong correlation to a group the other banks could never make a buck out of anyway.

It's their smaller New Zealand-owned competitors such as TSB, SBS and PSIS that feel the pain. Let's hope they don't go the same way as the moa.

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