Kiwibank to start paying dividends 24 February 2015 5:33PM Bernard Hickey Almost thirteen years after it was launched to provide home-grown competition for New Zealand's Big Four Australian-owned banks, Kiwibank is set to begin paying dividends and no longer requires capital injections from its state-owned parent. Kiwibank, which is owned by the Government-owned New Zealand Post, reported a record high NZ$71 million net profit for the six months to December 31, up 37 per cent from the same period a year earlier. This represented more than 70 per cent of the profits of the New Zealand Post Group, which is battling a ten per cent fall in letter volumes. Kiwibank's move to pay dividends and focus on cost reduction while growing lending at a single digit pace is a milestone for a bank that spent its first decade growing lending and costs at double digit rates while also calling on its parent for capital injections.Chief Executive Paul Brock told a media briefing the bank planned to pay its first annual dividend to New Zealand Post because of the strong result, which was driven by an expansion in net interest margin, lower costs, fewer bad loan charges and lending growth that was faster than the rest of the market. Brock said the bank was now in a self-funding position with shareholders equity of NZ$1.038 billion built up over the 13 years of operation and a tier one capital ratio of 10.8 per cent, up from 10.2 per cent a year earlier. Its annual return on equity rose to 13.2 per cent from 11.5 per cent a year ago.Total lending grew 7.9 per cent or NZ$1.1 billion to NZ$15.05 billion, which was faster than lending growth in the banking system of just over four per cent and was funded by 7.0 per cent or NZ$871 million growth in customer deposits. Kiwibank's net interest margin rose to 2.16 per cent from 1.82 per cent a year earlier, driven by expansion in deposit margins and offset somewhat by competition in mortgage lending and a shift from more profitable floating mortgage rates to fixed rates. Brock said net interest margins could fall later in the year because of competition in lending and in deposits, but he was hopeful a stable Official Cash Rate could slow the switching to low margin fixed rate mortgages.He said he expected Kiwibank's cost to income ratio for the full year would improve significantly on the previous year as the bank continued to bear down on costs. Operating costs fell to NZ$176 million in the half year from NZ$184 million in the half year to June 30, driving the cost to income ratio down to 62.4 per cent from 71.8 per cent in the June half and 69.3 per cent in the same half a year ago. The New Zealand Post Group paid a half-year dividend of NZ$2.5 million, but Kiwibank's General Disclosure Statement showed Kiwibank had not paid its parent any dividends in the first half.