Kiwibank boss Steve Jurkovich is forecasting flat profits for the bank over the next few years as it continues an aggressive growth strategy while investing in technology and its separation from New Zealand Post.
The state-owned bank whose holding company is 53 per cent owned by NZ Post, 25 per cent by the New Zealand Superannuation Fund and 22 per cent by ACC, this morning posted an 18 per cent fall in its half year net profit to $51 million for the six months to December.
Speaking after the results were released Jurkovich said the bank had grown pretty strongly.
"And there comes some cost with that."
Kiwibank's loans and advances rose from $20.4 billion to $21.5b while its deposits and other borrowings rose from $18.2b to $19.2b compared to the same prior period.
Its business lending was up 17 per cent and home loans were up by 4 per cent in the six months to 31 December 2019.
Kiwibank saw its net interest income rise slightly from $223m to $225m but its operating expenses blew out from $183m to $207m.
"We have invested in compliance and I think you saw that in the other competitor results as well."
He said that investment was about making sure existing customers were getting the right outcomes but also making sure in the future it was designing products to support that.
"We invested more in technology and moving towards our transformation than we have for the last 12 months. That investment is picking up all the time - I would expect our results to be pretty flat for a few years as we invest more and more in growing the business."
The bank saw its margin squeezed down from 2.13 per cent to 1.97 per cent.
Jurkovich said it had had to "pay up a bit" for deposits to ensure it matched its loan growth last year.
Across the industry the home lending market jumped up in the second half of last year in response to cuts in the official cash rate.
"It is probably the key thing in the industry at the moment. This last six months we have match funded. So we have grown our deposits as much as we have lent. We have paid up a bit for that - so the whole industry margins have come back a bit."
While that was some good news for depositors he said it was still tough going for them.
"It is great for borrowers but for people relying on savings for income it's been pretty tough going. I think them getting a little bit of a better deal has been a positive for them. At the end of the day there is a market that is competing for those deposits - but it is pretty balanced at the moment."
That balance was key as banks head into the start of the new higher capital regime from July.
Some of the Australian owned New Zealand banks have been holding back capital they would normally pay as a dividend to their parent to prepare for the change.
Jurkovich said Kiwibank's dividend payments were already moderate because it was in a transformation mode.
"Shareholders aren't expecting big dividends from us so it's really business as usual for us."
It paid out $11m in the six months to December down from $14m.
But he said the bank would look to issue some capital raising opportunities that both wholesale and retail investors could buy into.
Kiwibank is also continuing its separation from NZ Post setting up independent bank branches and closing jointly run operations.
Jurkovich said that change was running to plan.
"By the end of June this year we will be through the vast majority of decisions and choices that had to be made. But there will be some things - we have got a long shared heritage
- we will continue to do together for a while. At a shop front level we will be a long way down the track on that."
Jurkovich said the second half of its financial year was tracking in line with the first half and it would continue to focus on simplifying the business through product rationalisation as well as looking at selling non-core assets like the Prezzy card business which it sold in November.