Fledgling Kiwibank is taking off

Sam Knowles attributes the bank's performance to the quality of execution in establishing it from scratch. Picture / Mark Mitchell

The speed of state-owned Kiwibank's growth has surprised even its own chief executive, who says the bank's competitive product offerings have driven better value for bank customers right across the industry.

Kiwibank yesterday reported a $15.8 million net profit, more than double last year's $7.2 million.

Chief executive Sam Knowles said the result was "better than our best expectations".

The bank's performance was down to "the quality of execution" in establishing the business from scratch.

"And probably we underestimated the underlying desire of New Zealanders to embrace a New Zealand value bank."

Knowles said the major banks were continuing to lose customers to Kiwibank, a phenomenon noted in a recent report published by investment bank Merrill Lynch.

In order to address that, the majors were offering better rates and services.

"Having a vigorous competitor competing on value has led to [price] reductions for consumers right across the market and clearly over time we'd expect to see reductions in profits in the bigger banks," he said.

Kiwibank's June year profit was achieved on strong growth in loans and deposits, which were both up by 66 per cent on last year.

Total operating revenue at $150.31 million was up 35 per cent.

But Kiwibank is still making nearly twice as much revenue from sources other than net interest income. In contrast, its rivals typically make roughly two-thirds of their revenue from interest.

Commentators note that it is difficult to make comparisons between Kiwibank, which opened for business in 2002, and its rivals because its finances remained entwined with those of its parent, NZ Post.

Apart from that, NZ Post has contributed a further $17 million to support Kiwibank as it continues to grow, taking its total contributions to $172 million since start-up.

"As our profits increase we will expect to be self-sustaining," said Knowles.

"But it's still a couple of years away."

Kiwibank's expenses at $125.16 million gave it an operating expense to total income ratio of 83.3 per cent. Its larger rivals have ratios up to 40 percentage points lower than that.

Kiwibank would continue to bring its ratio down but was unlikely to get it as low as its rivals.

Said Knowles: "We don't believe the current level of profitability our competitors are doing is either desirable or sustainable in the long term."