Kiwibank's taxpayer funded shareholders may have to take a lower dividend or tip more money into the bank under the Reserve Bank's proposed increases to capital, its chief executive says.
The bank, which is 53 per cent owned by New Zealand Post and 47 per cent owned by crown entities the New Zealand Superannuation Fund and ACC, declared a half year profit of $62 million for the six months to December 31 on Wednesday.
The Reserve Bank is proposing to nearly double the capital required by banks in order to make them better able to stand up to shocks.
The big four - ANZ, BNZ, Westpac and ASB could see tier one capital requirements increase from the current 10.5 per cent to 16 per cent as a percentage of risk weighted assets while smaller banks like Kiwibank could see it rise to 15 per cent.
The proposed changes which are open for consultation until May, would come in over a five year period.
New chief executive Steve Jurkovich, who took on the top job in July last year, said it supported the Reserve Bank's philosophy behind its capital proposals but it was not without implications.
"It creates more of an even playing field in several areas, like how capital requirements are calculated, but it is not without implications.
"We understand and support the Reserve Bank's philosophy. It is in everyone's interest to have a strong local banking system that is deeply invested in New Zealand and supports great customer outcomes.
He said Kiwibank's capital levels were currently significantly above regulatory requirements but it would need to review its position over the transition period.
Jurkovich said part of the capital for Kiwibank could come from retained earnings - which would potentially mean lower dividends paid to its shareholders - or shareholders may have to put more money in.
Jurkovich said its shareholders had their "eyes wide open" about their investment in Kiwibank.
He said both ACC and the Super Fund were long term investors and had given a clear message to the bank about reinvesting in the business to grow it.
A spokeswoman for the New Zealand Superannuation fund said it was a very supportive shareholder of Kiwibank which was on an "exciting growth trajectory".
"We will continue to support the bank over and above any regulatory capital requirements as it achieves that growth strategy."
An ACC spokesperson said: "As a shareholder, ACC supports Kiwibank's growth strategy. Discussions on what capital requirements are needed to support this strategy, and other requirements, are ongoing."
Jurkovich said the five year timeframe was "doable" for the bank although others may feel differently.
Analysts at UBS and Macquarie have warned the proposed changes could add up to 120 basis points to mortgage interest rates.
But Jurkovich said he believed a 120 basis point increase was an "outlier" prediction.
"The question is will the Australian parents be prepared to accept reduced returns?" he questioned.
What happened to mortgage interest rates would depend on the decisions of the big four banks, he said.
There have also been warnings that the increased capital requirements will make it harder for people to borrow.
But Jurkovich dismissed that.
"I'm not convinced this will see a big drain on credit availability either."
Kiwibank's profit rose from $42million in the six months to December 31, 2017 but that result was impacted by a big write-down from its failed CoreMod IT project.
The underlying net profit was up $4m increasing from $58m to $62m.
The bank saw its loans and advances rise 7.2 per cent from $18.027 billion as of the end of 2017 to $19.316b as of the end of 2018.
While its deposits and other borrowings rose 9.2 per cent from $15.96b to $17.43b.
Jurkovich said in just six months it had achieved more than twice the growth for the full year period.
"Kiwibank is back to the performance levels it enjoyed before the Kaikoura earthquake and the abandoned technology project CoreMod," he said.
The bank saw a 13 per cent rise in its net interest income from $196m to $223m while its margin also improved from 2 per cent to 2.15 per cent.
But its impairment losses rose over the half from $1m to $4m.
Jurkovich said it was also focused on its cost to income ratio.
"While an eight per cent improvement is pleasing, looking forward, operating expenditure sitting at 67 per cent of income is unsustainable.
"We are finding ways to improve efficiency and work smarter while better serving our customers."