Home loan applications have "fallen sharply" since the start of year and changes need to be made quickly to fix the credit law, Kiwibank boss Steve Jurkovich says.
But he is hopeful the Government's review of the recently tightened credit laws could ease restrictions quickly and encourage borrowers back to the table.
The state-owned bank on Thursday morning declared a 16 per cent rise in its half-year net profit to $64 million for the six months to December 31 on the back of strong home and business lending.
Jurkovich said since then it had seen application numbers down quite a lot but it was hard to know how much was attributable to the tigher conditions brought in under the Credit Contracts and Consumer Finance Act in December.
"I think what it is really hard to tell is the number of customers because of the CCCFA who decided to not even apply.
"We see applications once they come in and those are sharply down and I think that is true right across the market. But also we don't know how many people have said it seems like it is hard, maybe I will just stay where I am."
Jurkovich said the "kitchen sink" had been thrown at the housing market.
"LVRs, property rules, interest rates, CCCFA, building costs, trying to get builders, heat pumps and ovens and all those things - those are all quite big headwinds. My sense is that the CCCFA just before Christmas is just one of the things that has really started to slow things."
Loan applications were taking longer to process and there was a higher decline rate but it was the drop in applications that was the most noticeable, he said.
The law was tightened to prevent vulnerable customers from being trapped into debt by high-cost lenders but has captured all lenders and borrowers, requiring them to provide much more detailed information and evidence they can afford a loan.
"For a lot of customers in the last few years that will be a totally different experience to what they had three years ago and I don't think it was reckless lending three years ago.
"You can have a look at the credit conditions and there hasn't been problems but it is harder. I think banking is one of those things where perception matters - if you think it is going to be hard then it is going to be hard and so you say to yourself maybe I won't move."
The Government has said it will review the changes to the act and move quickly to make tweaks after a flood of complaints by consumers and a petition signed by more than 10,000 people was gathered.
Jurkovich said he hoped to see changes made quickly.
"That is certainly the point we made through discussions with the minister. I genuinely believe they were listening that they can see some change is required. Hopefully we see some pretty quick changes."
Jurkovich wants to see a return to using household spending averages to judge whether a loan is affordable rather than having to comb through individuals' spending.
"I think if we can get some refinement for existing borrowers if we can start to benchmark your expenses against a standard set of expenses rather than how much did you spend on coffee and those sorts of things over the last 90 days - then that could clear the way."
He would also like to see differentiation in the way a $1000 credit card limit is treated compared to a $2 million home loan.
"I think we can change the way we look at those things quite quickly and hopefully that would free things up a lot. Those are a couple of the changes I would certainly like to see."
Jurkovich said it was also seeing a slowing in demand for business lending.
"People's confidence to invest and grow is definitely down. Our growth has been about attracting new customers."
The Omicron outbreak has already forced some hospitality businesses to temporarily close, with too many staff off sick or self-isolating or unable to operate profitably under the red traffic light restrictions.
"When you see big businesses like Little Creatures and others shut the doors for staffing that is quite different to what any of us have been seeing in the past six months.
"That disruption from staffing, supply chain hold-ups, no RAT tests - all those things don't help."
But he was hopeful that could change quickly with more RAT tests becoming available and fewer isolation requirements under Phase 3 of the Government's plan.
Despite the headwinds, Jurkovich said he was confident the bank could keep up its momentum for the second half of its financial year.
"At the moment we think we can. The good thing about having a strong first half is it does help you in the second half.
"We think margins on savings look more interesting than it has been in the last couple of years and we think we will see more activity on the deposit side of the book.
"The big driver for us is the home loan market and people applying, so if those CCCFA changes can come through reasonably quickly, we can get through the peak of Omicron maybe in the next six to eight weeks then I feel pretty good about things. If Omicron drags on for months and other things happen, then perhaps not so much."
Financial disclosure documents for the bank show it paid a dividend of $5.6m to its parent Kiwi Group Holdings.
The Government is also in the process of reviewing the ownership structure of Kiwi Group Holdings, which is currently 53 per cent owned by NZ Post, the New Zealand Superannuation Fund (25 per cent) and ACC (22 per cent).
Jurkovich said the bank was not in a position to make any comment on the ownership review and referred questions to Finance Minister Grant Robertson and its shareholders.