Kiwibank says it IT system revamp will cost significantly more than the $100m it originally forecast.

The state-owned bank which today reported an 11 per cent drop in its half year profit,
is entering the second phase of the modernisation of its core banking platform.

The bank has already completed its payment engine revamp and will later this year complete the data migration phase for savings and transactions.

But chief executive Paul Brock would not give a final figure on how much it would cost or when it would be completed by.


"It depends how long we plan to stagger that final phase," he said.

But Brock said a figure of $100 million was given at the start of the programme and the final figure would be "significantly more."

Kiwibank reported a $63 million net profit for the six months to December 31, down from $71m in the same period on the back of funding pressure and infrastructure spending.

The bank's operating expenses rose from $146m to $164m in the six months to December 31, compared to the same prior period.

Brock said more than half of that increase was down to an accounting treatment change which was a result of its change in ownership while the remainder was linked to IT investment and depreciation.

Last year New Zealand Post sold 47 per cent of Kiwi Group Holdings, Kiwibank's parent company, to the New Zealand Superannuation fund and ACC.

Brock said it was too soon to say what changes the new ownership structure would bring.

Total lending by the bank increased 4.4 per cent to $17.43 billion while deposits grew at a slower rate increasing 3.9 per cent to $15.36b.

Impaired assets fell to 0.05 per cent of total loans and advances but operating expenses increased from $146m to $164m.

Brock said lending activity at the bank continued to grow although it was at a lower margin than previous periods.

The net interest margin dropped from 2.1 per cent in December 2015 to 1.94 per cent in December 2016 and Brock said he would like to see that come back up this year.

While other banks have talked about rising funding costs driven by having to borrow more on the international wholesale market.

Brock said it was relatively insulated from that.

"Domestic deposits continue to provide essential funding for more than 80 per cent of Kiwibank's lending, which insulates it to a degree from volatile international markets."

Brock said the bank had seen continued growth in small to medium business banking which was encouraging as it was a major target area for it.

"New Zealand is built on small businesses and there is a natural alignment between those businesses and a New Zealand-owned company like Kiwibank."

Kiwibank's parent company, Kiwi Group Holdings which includes KiwiSaver business Kiwi Wealth, Kiwi Insurance and mortgage broker NZ Home Loans as well as the bank, reported a net profit of $65m - down from $73m.