Surge in expenses and drop in net interest margin push Kiwibank interim profit down 18% with more investment ahead

Surge in expenses and drop in net interest margin push Kiwibank interim profit down 18% with more investment ahead

Kiwibank's half-year profit fell 18% as expense growth of 13% easily outstripped the bank's 1.5% income growth, and its net interest margin dropped 16 basis points.

Kiwibank says its net profit after tax for the six months to December 31 last year fell $11 million, or 18%, to $51 million from $62 million in its previous half-year.

The profit drop came as operating expenses climbed $24 million, or 13%, to $207 million from $183 million. CEO Steve Jurkovich attributed this to customer growth, investment in a transformation programme, and bolstering risk and compliance operations. Jurkovich said the increased expenses were expected, with investment in standalone branches meaning "change" to the bank's network.

Total operating income gained $4 million, or 1.5%, to $277 million from $273 million, with net interest income up $2 million to $225 million. Credit impairment losses rose $1 million to $5 million.

Jurkovich attributed the modest income rise to above system growth in lending and deposits, and a one-off gain from the sale of the Prezzy card business to epay New Zealand Limited in November. A transitional agreement is in place through which Kiwibank will operate parts of the Prezzy business on behalf of epay for an ongoing fee until epay takes on the full operation and issuance of the cards. Kiwibank says a $12 million was recognised within "other income" in relation to the gain on sale.

Kiwibank's December half-year net interest margin fell 16 basis points year-on-year to 1.97%. This, the bank said, was due to margin compression on deposits following higher than expected falls in the Official Cash Rate and "limited movement" in deposit rates.

Net lending grew $1.1 billion, or 5.3% to $21.523 billion, and net deposit growth was 5.4%, or $1 billion, to $19.217 billion. Jurkovich said business lending grew 17% and home loans grew 4%. Total assets increased $1.352 billion to $24.086 billion in the six months from June to December 2019.

The bank's cost to income ratio jumped to 74.7% from 67%.

Jurkovich said continued investment is required to ensure Kiwibank is fit to deliver on its purpose, which is to be a New Zealand owned bank that makes Kiwis better off. Last August Jurkovich told interest.co.nz Kiwibank was underway with a major reshaping of the business that's likely to cost hundreds of millions of dollars over a four or five year period.

Kiwibank, which is owned by NZ Post, the NZ Super Fund and the Accident Compensation Corporation, paid an interim dividend of $11 million, down from $14 million in the first half of its previous financial year.

A Kiwibank presentation on its financial results is here. And the bank's press release is here.

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These results won't be worrying the competition.

they are playing the long game, they will get there slowly and hopefully carefully
its nice to see the dividends stay in this country rather than heading to aussie

It's not going to be a very long game with no top-line growth and expenses blowing out like that. I'm sure their hearts are in the right place but it's all about execution, particularly strategy and technology.

Just wondering about technology and how it makes banks more profitable. You can integrate into customer's lives more easily I guess, but I would think that tech-driven innovation in banking is detrimental to their bottom line.

Try saying that to banks who lose customer share to more 'tech focused', and therefore more user friendly, lenders. This is already happening. Tech makes banks profitable by keeping customers on their books and not with the competition.

I get your point but is this the kind of lending business space that banks of this scale want to play in?

I would argue tech is the most important area. Core banking platforms, general ledger, payments engine, credit engine, UI's etc. Look at the outcry when a banks platform goes down and many of the regulatory breaches are due to inadequate systems.

Is there any advantage in further investment in technology? Every bank now has online banking, apps, calculators etc. People might switch bank but it's unlikely to be because one banks app. is very slightly better than anothers.

Incidentally I'd have thought the most valuable part of a bank was the data they hold about customers that could be used to sell targeted advertising.

The tech I'm referring to is the core architecture, not the user interface so much.

The tech I'm referring to is the core architecture, not the user interface so much.

That's just operations which improves efficiencies. Banks increase revenue from selling greater volume of debt now.

Incidentally I'd have thought the most valuable part of a bank was the data they hold about customers that could be used to sell targeted advertising

As a revenue stream, very small. Also, with privacy issues (think GDPR), there are limitations.

Wasn't "transformation" last years excuse for poor results as well? Change is a constant within businesses and should not be an excuse for poor performance.

This is the trend that is going to take a long time to come here...
https://www.reuters.com/article/us-lendingclub-radius/lendingclub-to-acq...

Yes. The banking cartel has a firm grip on NZ at the moment.

"Net lending grew $1.1 billion...net interest margin fell 16 basis points year-on-year to 1.97%"
Kiwibank's lending was up but their net interest margin is down. So they reduced their income to generate growth. A sustainable long term strategy?

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