Financial results of Kiwi Group Holdings (including Kiwibank) for the year ended 30 June 2017

01/09/2017

Kiwi Group Holdings (‘Group’), which includes Kiwibank, has reported an unaudited net profit after tax for the year ended 30 June 2017 of $58 million. The result has been significantly impacted by an impairment of $90 million ($65 million after tax) relating to the work in progress on the IT project known as CoreMod. The decision to make the impairment is a result of a strategic review to ensure the Bank’s future IT systems meet rapidly-changing technology and customer requirements.

The Group’s unaudited underlying profit* of $129 million was down $2 million (1.5%) compared with $131 million in the prior comparative period.

The Kiwibank Banking Group (‘Kiwibank’), which provides the bulk of the Group’s earnings, achieved an unaudited net profit after tax* for the year ended 30 June 2017 of $53 million. Kiwibank’s unaudited underlying profit was $122 million.

Group Chief Executive Paul Brock said that maintaining similar levels of underlying profitability to last year’s performance, without full flexibility to optimise funding costs, is very pleasing – all the more so despite a number of external disruptions, notably the impact of last November’s earthquake as well as regulatory challenges.

During the year to 30 June 2017, the Group:

All comparisons are with the previous year unless otherwise noted

  • Grew lending and advances to customers by 6.8% from $16.7 billion to $17.8 billion
  • Grew customer deposits by 8.1% from $14.8 billion to $16.0 billion
  • Continued to build presence in the SME sector, having 8.0% market share at the end of June
  • Increased KiwiSaver membership by 13%

Mr Brock said the past year was a remarkable one for the Group with New Zealand Post divesting 47 per cent of its shareholding to ACC and the New Zealand Super Fund last October, as well as issues with the Reserve Bank relating to capital in March (prompting a $247 million shareholder capital injection) – recently resolved in favour of Kiwibank on 10 August.

Governance changes to the Kiwibank Board were also made with the appointment of a new chair and new directors.

Overall, Mr Brock said profitability across the Group was commensurate with the operating environment, levels of investment and work underway to deliver on our ambitions ‘We’re positioning ourselves to take full advantage of the opportunities in front of us, predominantly with a digital focus – we’re committed to our customers and long term value creation for our shareholders’.

* Unaudited net profit after tax has business activities of Kiwibank and the Group. Refer to Summary of Key Financial Information for details of reconciling items between underlying profit and net profit

Strategic Review

Mr Brock said that to accelerate and achieve the best long term outcomes for the Group, a shareholder initiated strategic review is focusing on a number of options for how best to deliver a digital future. ‘The way customers interact with Kiwibank is changing almost as rapidly as the technology required to support their increasing preference for digital banking experiences. In the past year over 40% of sales, for example, were completed through a digital channel. More than 57% of customers digitally connect with Kiwibank, collectively over 27 million times each month’.

Mr Brock said these numbers are expected to climb along with advances in the technology that enable this trend. As a consequence, a review of the project underway to modernise Kiwibank’s core banking system (known as CoreMod) is being conducted to assess the value of some of the work completed so far.

While this review is being completed, a decision has been made to impair the value of the work in progress which currently sits on the balance sheet as an intangible asset. The assets associated with the successful migration of our batch payments to a SAP solution are unaffected.

There is no impact on the current core banking system which is stable and functioning.

Mr Brock said the decision to impair at this time is prudent and reflects the challenges and changing nature of banking since Kiwibank first contemplated the upgrade four years ago. ‘We need to ensure that our broader IT infrastructure (not just the core system) doesn’t limit delivery of our long term strategy’.

Operational highlights

Operationally, Mr Brock said the Group had made improvements to the retail network including upgrades and another new stand-alone Kiwibank branch (in central Auckland), as well as some strategic closures.

Kiwibank has more than 1 million customer relationships. Market share in the highly competitive mortgage market has been maintained at around 7.0%, while the business banking team is cementing its presence in the SME sector, commanding 8.0% market share at the end of June.

The Kiwi Wealth, Kiwi Insure, and New Zealand Home Loans businesses have also experienced growth, particularly the Wealth division, which now manages nearly $4 billion of invested funds and serves over 158,000 KiwiSaver customers.

Mr Brock said the value of establishing the Hastings office to provide cover for essential banking operations was confirmed following last year’s mid-November earthquake which displaced around 1200 people from the Wellington Head Office. ‘We immediately dispatched about 100 staff from Wellington to Hastings to ensure banking services were not interrupted. It is a tribute to our people that we were able to conduct business as usual at a time of considerable upheaval’.

Those displaced have been operating from seven offices in the Hutt Valley, Porirua and central Wellington but Kiwibank has plans to consolidate the head office later next year.

Summary of Key Financial Information – Kiwi Group Holdings

$m

Jun 16

Jun 17*

change

classification change

Unaudited results

Income statement (extract)

Net interest income

378

375

(0.8%)

 

Net fee and other income

150

180

20.0%

8.7%

Operating expenses

(328)

(384)

17.1%

11.9%

Net profit after tax

131

58

(55.7%)

 

Reconciliation of net profit to underlying profit

Net profit after tax

131

58

   

Reconciling items (net of tax):

Other impairment losses1

65

   

Earthquake costs2

6

   

Underlying profit

131

129

(1.5%)

 

CTI

62%

68%

   

Total assets

19,454

20,739

6.6%

 

Total equity

1,045

1,453

39.0%

 

$m

Jun 16

Jun 17*

change

classification change

Unaudited results

Income statement (extract)

Net interest income

378

375

(0.8%)

 

Net fee and other income

150

180

20.0%

8.7%

Operating expenses

(328)

(384)

17.1%

11.9%

Net profit after tax

131

58

(55.7%)

 

Reconciliation of net profit to underlying profit

Net profit after tax

131

58

   

Reconciling items (net of tax):

Other impairment losses1

65

   

Earthquake costs2

6

   

Underlying profit

131

129

(1.5%)

 

CTI

62%

68%

   

Total assets

19,454

20,739

6.6%

 

Total equity

1,045

1,453

39.0%

 

1 Other impairment losses: Impairment loss recognised in relation to computer software

2 Earthquake costs: Earthquake costs are operating expenses incurred by the Group as a result of the November 2016 Kaikoura earthquake net of insurance payments received to date.

3 The classification change includes an unaudited adjustment to reflect the impact of the $17m of retail network costs in the period ended 30 June 2017 that were formerly classified as direct expenses and are now classified as operating expenses due to changes in the agreements governing the operation of the corporate retail network

*June 17 unaudited

Summary of Key Financial Information - Kiwibank Banking Group

$m

Jun 13

Jun 14

Jun 15

Jun 16

Jun 17*

Interest income

790

798

957

898

831

Interest expense

(514)

(505)

(596)

(525)

(463)

Net interest income

276

293

361

373

368

Gains/(losses) on financial instruments

3

5

3

8

Net fee income

106

104

107

101

118

Operating expenses

(240)

(265)

(284)

(301)

(339)

Impairment losses on loans and advances

(7)

4

(13)

(11)

6

Other impairment losses

(90)

Profit before taxation

135

139

176

165

71

Income tax expense

(38)

(39)

(49)

(41)

(18)

Net profit after tax

97

100

127

124

53

Reconciliation of net profit to underlying profit

Net profit after tax

97

100

127

124

53

Reconciling items (net of tax):

Other impairment losses1

65

Earthquake costs2

4

Underlying profit

97

100

127

124

122

CTI

63%

66%

60%

63%

69%

Dividends paid on ordinary shares

   

(22)

(29)

(5)

Other distributions paid

(9)

(9)

(9)

(11)

(13)

$m

Jun 13

Jun 14

Jun 15

Jun 16

Jun 17*

Interest income

790

798

957

898

831

Interest expense

(514)

(505)

(596)

(525)

(463)

Net interest income

276

293

361

373

368

Gains/(losses) on financial instruments

3

5

3

8

Net fee income

106

104

107

101

118

Operating expenses

(240)

(265)

(284)

(301)

(339)

Impairment losses on loans and advances

(7)

4

(13)

(11)

6

Other impairment losses

(90)

Profit before taxation

135

139

176

165

71

Income tax expense

(38)

(39)

(49)

(41)

(18)

Net profit after tax

97

100

127

124

53

Reconciliation of net profit to underlying profit

Net profit after tax

97

100

127

124

53

Reconciling items (net of tax):

Other impairment losses1

65

Earthquake costs2

4

Underlying profit

97

100

127

124

122

CTI

63%

66%

60%

63%

69%

Dividends paid on ordinary shares

   

(22)

(29)

(5)

Other distributions paid

(9)

(9)

(9)

(11)

(13)

1 Other impairment losses: Impairment loss recognised in relation to computer software

2 Earthquake costs: Earthquake costs are operating expenses incurred by Kiwibank as a result of the November 2016 Kaikoura earthquake net of insurance payments received to date

*Jun-17 unaudited

$m

Jun 13

Jun 14

Jun 15

Jun 16

Jun 17*

Assets

Loans and advances

13,202

14,630

15,598

16,689

17,815

Other assets

2,007

2,046

2,746

2,668

2,801

Total assets

15,209

16,676

18,344

19.357

20,616

Liabilities

Deposits and other borrowings

12,120

12,751

13,740

14,782

15,983

Debt securities issued

1,508

2,143

2,397

2,207

2,258

Other liabilities

723

779

1,174

1,239

995

Total liabilities

14,351

15,673

17,311

18,228

19,236

Equity

Share capital

360

400

400

400

737

Reserves

349

454

633

729

643

Non-controlling interest

149

149

Total equity

858

1,003

1,033

1,129

1,380

Total liabilities and shareholders' equity

15,209

16,676

18,344

19,357

20,616

$m

Jun 13

Jun 14

Jun 15

Jun 16

Jun 17*

Assets

Loans and advances

13,202

14,630

15,598

16,689

17,815

Other assets

2,007

2,046

2,746

2,668

2,801

Total assets

15,209

16,676

18,344

19.357

20,616

Liabilities

Deposits and other borrowings

12,120

12,751

13,740

14,782

15,983

Debt securities issued

1,508

2,143

2,397

2,207

2,258

Other liabilities

723

779

1,174

1,239

995

Total liabilities

14,351

15,673

17,311

18,228

19,236

Equity

Share capital

360

400

400

400

737

Reserves

349

454

633

729

643

Non-controlling interest

149

149

Total equity

858

1,003

1,033

1,129

1,380

Total liabilities and shareholders' equity

15,209

16,676

18,344

19,357

20,616

*Jun 17 unaudited