Kiwibank pays first dividend

New Zealand's state-owned Kiwibank has reported a record high annual net profit of NZ$127 million and has paid its first annual dividend of NZ$22 million as it focuses on producing a return for its owner rather than market share growth.

Kiwibank reported a 27 per cent profit increase driven by a 26 basis point increase in its net interest margin to 2.12 per cent and a fall in its bad debt provisions to NZ$53 million from NZ$59 million.

After more than a decade of growing lending and customers much faster than the rest of the banking system and consuming capital from its owner New Zealand Post, Kiwibank has focused over the last two years on generating enough capital to first fund its own lending growth and now produce a dividend.

It has also embarked on a NZ$100 million rebuild of its core banking system and a shift to delivering more of its services digitally to reduce its reliance on its network of post office/bank branches and drag down its cost to income ratio of 60 per cent, which well above the sub 40 per cent levels of its Big Four Australian-owned rivals.

Kiwibank increased its lending 6.6 per cent to NZ$15.6 billion and increased customer deposits 7.8 per cent to NZ$13.7 billion. It also raised NZ$150 million through a perpetual note issue in May that qualified as regulatory capital. This helped lift Kiwibank's common equity tier one capital ratio to 9.3 per cent at June 30 from 9.0 per cent a year ago.

Chief executive Paul Brock told a news conference Kiwibank expected to increase its profits and dividends in the current financial year, although growth was expected to be more moderate due to a slowing economy.

He said Kiwibank had slowed its mortgage lending growth in the June quarter in response to the Reserve Bank's signalled tightening of lending rules for property investors in Auckland, and as Kiwibank avoided writing unprofitable business in the hot Auckland market.

New Zealand Post signalled it expected a dividend of NZ$40 million to NZ$50 million in the current year.

Brock said the first year of Kiwibank's four-year move to a SAP core banking system from its existing Ultradata system was in line with planned timeframes, but was proving more expensive than initially budgeted, although he expected the final cost to be in line with the budget of over NZ$100 million.

Brock said Kiwibank also continued to work with the Reserve Bank to be granted the same Internal Ratings Based (IRB) status as the Big Four Australian-owned banks for calculating its capital needs. He said he expected a resolution later this year and such a move would help reduce Kiwibank's capital requirements and put it on an "even keel" with its competitors.

Brock said Kiwibank did not expect to have to issue another perpetual note to meet its capital requirements.