Kiwibank Limited - Interim / Quarterly Report 2021

Disclosure Statement.

For the six months ended 31 December 2020

Number 72

Contents
General matters	1
Guarantees	3
Directors’ statement	4
Interim financial statements	5
Capital adequacy and regulatory liquidity ratios	44
Independent review report	51

General matters

Details of incorporation

Kiwibank Limited (“Kiwibank” or the "Bank") is a company domiciled in New Zealand and was incorporated in New Zealand under the Companies Act 1993 on 4 May 2001. On 29 November 2001, Kiwibank was registered as a bank under the Reserve Bank of New Zealand Act 1989 (the “RBNZ Act”) and was required to comply with the conditions of registration as laid down by the Reserve Bank of New Zealand (“RBNZ”) from that date onwards.

This Disclosure Statement has been issued by Kiwibank for the six months ended 31 December 2020, in accordance with the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended) (the “Order”). Words and phrases defined by the Order have the same meanings when used in this Disclosure Statement.

In this Disclosure Statement, “Banking Group” means Kiwibank’s financial reporting group, which consists of Kiwibank, all of its wholly owned entities and all other entities consolidated for financial reporting purposes.

Registered office

The registered office is: Kiwibank Limited, Level 9, 20 Customhouse Quay, Wellington 6011, New Zealand.

Address for service

The address for service is: Kiwibank Limited, Level 9, 20 Customhouse Quay, Wellington 6011, New Zealand.

Other material matters

Climate change related risks

Kiwibank recognises climate change is a significant threat to New Zealand’s environment and economy. The Bank’s strategy to address climate change includes work on both how to disclose the impact climate change will have on Kiwibank’s business and how to reduce Kiwibank’s emissions. An internal sustainability working group is developing Kiwibank’s strategic response to climate risk in line with the recommendations of the Taskforce for Climate-Related Financial Disclosure.

Kiwibank is also progressing analysis of the Bank’s exposure to climate risk, and sea level rises in particular, and will incorporate the identified risks into risk management policies as the analysis is completed.

The Board of Directors of Kiwibank (the “Board”) are of the opinion that there are no other matters relating to the business or affairs of Kiwibank or the Banking Group, which would, if disclosed in this Disclosure Statement, materially affect the decision of a person to subscribe for debt securities of which Kiwibank or any member of the Banking Group is the issuer.

Pending proceedings or arbitration

The Board is not aware of any pending legal proceedings or arbitration concerning Kiwibank or any member of the Banking Group, whether in New Zealand or elsewhere, that may have a material adverse effect on Kiwibank or the Banking Group.

Credit ratings

Kiwibank has the following credit ratings applicable to its long-term unsecured obligations payable in New Zealand, in New Zealand dollars:

Rating agency	Current credit rating	Rating outlook
S&P Global Ratings Australia Pty Limited (“S&P”)	A	Outlook Stable
Moody’s Investors Service (“Moody’s”)	A1	Outlook Stable
Fitch Ratings (“Fitch”)	AA	Outlook Stable

Kiwibank Limited

General matters continued

Conditions of registration

Changes in conditions of registration

The RBNZ has corrected an editorial error in condition 11 to reference condition 24 instead of condition 21. This was effective immediately from 1 December 2020.

There have been no other changes to Kiwibank’s conditions of registration from those which were in force at 30 June 2020.

Non-compliance with conditions of registration

The Bank identified individual instances of non-compliance with specific outsourcing requirements (Conditions of Registration 21) during the period. One arrangement was incorrectly treated as exempt and there were minor errors in the accuracy of entries into the BS11 Compendium for some arrangements. These errors have been corrected. Four arrangements were not entered into the Compendium within the required time.

For completeness, it is noted that:

The Bank completed its review of its compliance with its conditions of registration and the results are being discussed with the Reserve Bank.
The Reserve Bank provided Kiwibank with their draft findings and observations relevant to Kiwibank from their Thematic Review of Compliance with the Liquidity Policy (BS13).

Any disclosures that may be required from either review are expected to be reported in the Disclosure Statement for the period ending 30 June 2021.

Directorate

Alistair Bruce Ryan resigned as a director and Chair of the Finance, Audit and Disclosure Committee on 30 August 2020.

The Finance, Audit and Disclosure Committee was renamed the Audit and Risk Committee on 31 August 2020.

The Risk, Credit and Compliance Committee was combined with the Audit and Risk Committee on 21 October 2020.

Mary Jane Daly was appointed as a director and Chair of the Audit and Risk Committee on 31 August 2020.

Michael Charles John O’Donnell resigned as a director on 15 November 2020.

There have been no other changes in the Board for the six months ended 31 December 2020.

Responsible persons

Jonathan Peter Hartley and Mary Jane Daly have been authorised in writing to sign this Disclosure Statement in accordance with Section 82 of the RBNZ Act, on behalf of the directors, being:

Jonathan Peter Hartley Mary Jane Daly Kevin Mark Malloy Carol Anne Campbell Ian Cameron Blair John Gilbert Sproat Scott John Pickering

Auditor

The auditor whose review opinion is referred to in this disclosure statement is Jonathan Freeman assisted by PricewaterhouseCoopers, acting as agent on behalf of the Office of the Auditor General. His address for service is PricewaterhouseCoopers, PwC Centre, 10 Waterloo Quay, Wellington 6011, New Zealand.

Kiwibank Limited

Guarantees

As at the date the Board approved this Disclosure Statement, payment obligations of Kiwibank in relation to certain debt securities issued by Kiwibank have the benefit of a guarantee by Kiwi Covered Bond Trustee Limited (the “Covered Bond Guarantee”). Also, the payment obligations of Kiwibank owed as at 28 February 2017 and still outstanding have the benefit of a deed poll guarantee by New Zealand Post Limited (the “NZP Guarantee”).

Further details on the guarantees can be obtained by referring to Kiwibank’s Disclosure Statement for the year ended 30 June 2020 which is available at www.kiwibank.co.nz.

On 31 October 2016, New Zealand Post Limited (“NZP”) gave notice of the termination of the NZP Guarantee (with an effective date of withdrawal of 28 February 2017). This termination did not affect any payment obligations of Kiwibank that were already guaranteed at the time the guarantee was terminated. A summary of the details of each guarantee are set out below.

Covered Bond Guarantee

Certain debt securities (“Covered Bonds”) issued by Kiwibank are guaranteed by Kiwi Covered Bond Trustee Limited (the “Covered Bond Guarantor”), solely in its capacity as Trustee of Kiwibank Covered Bond Trust. No material conditions apply to the Covered Bond Guarantee other than non-performance by Kiwibank. There are no material legislative or regulatory restrictions in New Zealand which would have the effect of subordinating the claims under the guarantee of any creditors of the Banking Group on the assets of the Covered Bond Guarantor, to other claims on the Covered Bond Guarantor, in a winding up of the Covered Bond Guarantor.

The Covered Bond Guarantor’s guarantee is limited to the payment of interest on and the principal of Covered Bonds, and such guarantee is secured over a pool of assets. There are no other limits on the amount of obligations guaranteed. The carrying value and approximate fair value of the Kiwi Covered Bond Trust pool at 31 December 2020 is $1,000m (31 December 2019: $316m; 30 June 2020: $316m).

The Covered Bond Guarantor’s address for service is Level 9, 34 Shortland Street, Auckland 1010, New Zealand. The Covered Bond Guarantor is not a member of the Banking Group and has no applicable credit rating. The Covered Bonds have been assigned a long-term rating of Aaa and AAA by Moody’s and Fitch, respectively.

NZP Guarantee

NZP continues to support Kiwibank as a registered bank through the NZP Guarantee to the extent of guaranteed payment obligations that existed as at 28 February 2017. No material conditions apply to the NZP Guarantee other than non-performance by Kiwibank.

The following is a summary of the main features of the NZP Guarantee effective for payment obligations that existed as at 28 February 2017:

i. The address for service of NZP is: Ground Floor, New Zealand Post House, 7 Waterloo Quay, Wellington 6011, New Zealand.
ii. NZP is not a member of the Banking Group (as that term is defined in the Order).
iii. The NZP Guarantee is an unsecured guarantee of all the payment obligations (excluding any payment obligations, the terms of which expressly provide in writing that they do not have the benefit of the NZP Guarantee) of Kiwibank owing as at 28 February 2017 and still outstanding. The NZP Guarantee has no expiry date in relation to the payment obligations that continue to be guaranteed.
iv. There are no material legislative or regulatory restrictions in New Zealand, which would have the effect of subordinating the claims under the NZP Guarantee of any of the creditors of Kiwibank on the assets of NZP, to other claims on NZP, in a winding up of NZP. The net tangible assets of NZP were $680m as calculated from NZP's most recent publicly available audited financial statements for the year ended 30 June 2020 (there were no modifications in the audit report
accompanying the NZP Annual Report). The net tangible assets are also disclosed in the Director’s Report in the NZ Post Group Finance Limited Annual Report for the year ended 30 June 2020.

NZP has a credit rating applicable to its long-term unsecured obligations payable in New Zealand, in New Zealand dollars, from S&P of A with a stable outlook.

Kiwibank Limited

Directors’ statement

The directors of Kiwibank state that each director believes, after due enquiry, that:

Signed by Jonathan Peter Hartley and Mary Jane Daly as directors and responsible persons on behalf of all the directors listed in the Directorate of this Disclosure Statement:

As at the date on which the Disclosure Statement is signed:
I. the Disclosure Statement contains all the information that is required by the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended); and
II. the Disclosure Statement is not false or misleading.

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During the period ended 31 December 2020:
i. Kiwibank has complied with the conditions of registration applicable during the period except for those disclosed on page 2;

24 February 2021

ii. credit exposures to connected persons were not contrary to the interests of the Banking Group; and
iii. Kiwibank had systems in place to monitor and control adequately the Banking Group’s material risks, including credit risk, concentration of credit risk, interest rate risk, currency risk, equity risk, liquidity risk, operational risk and other business risks, and that those systems were being properly applied.

Kiwibank Limited

Interim financial statements

Income statement

For the six months ended 31 December 2020

		Unaudited	Unaudited	Audited
		6 months	6 months	year
		ended	ended	ended
Dollars in millions	Note	31/12/20	31/12/19	30/06/20
Interest income		388	461	894
Interest expense		(138)	(236)	(439)
Net interest income		250	225	455
Net gains on financial instruments	2	4	6	13
Gross fee and other income		76	98	181
Direct fee expenses		(43)	(52)	(96)
Net fee and other income	3	33	46	85
Total operating income		287	277	553
Operating expenses		(209)	(207)	(428)
Profit before credit impairment and taxation		78	70	125
Credit impairment losses	5	-	(5)	(51)
Profit before taxation		78	65	74
Income tax expense		(23)	(14)	(17)
Profit after taxation		55	51	57

Statement of comprehensive income

For the six months ended 31 December 2020

	Unaudited	Unaudited	Audited
	6 months	6 months	year
	ended	ended	ended
Dollars in millions	31/12/20	31/12/19	30/06/20
Profit after taxation	55	51	57
Other comprehensive income
Net (loss)/gain from changes in reserves that may subsequently be reclassified to profit or loss
- Fair value reserve (net of tax)	(5)	(5)	13
- Cash flow hedge reserve (net of tax)	27	9	(22)
Other comprehensive income for the period/year	22	4	(9)
Total comprehensive income for the period/year	77	55	48

The notes to the financial statements form an integral part of, and should be read in conjunction with, these financial statements.

Kiwibank Limited

Interim financial statements continued

Statement of changes in equity

For the six months ended 31 December 2020

	Fully Paid			Cash Flow	Total
	Ordinary	Retained	Fair Value	Hedge	Shareholder's
Dollars in millions	Shares	Earnings	Reserve	Reserve	Equity
Audited balance at 30 June 2019	737	823	11	(22)	1,549
Balance adjusted for adoption of NZ IFRS 16	-	1	-	-	1
Opening balance as at 1 July 2019	737	824	11	(22)	1,550
Unaudited 6 months ended 31 December 2019
Unaudited profit for the period	-	51	-	-	51
Other comprehensive income
Movement in fair value of investment securities (net of tax)	-	-	(5)	-	(5)
Cash flow hedges (net of tax)	-	-	-	9	9
Total other comprehensive income	-	-	(5)	9	4
Total comprehensive income	-	51	(5)	9	55
Transactions with owners
Dividends paid on ordinary shares	-	(11)	-	-	(11)
Distributions to holder of perpetual capital	-	(5)	-	-	(5)
Unaudited balance at 31 December 2019	737	859	6	(13)	1,589
Audited year ended 30 June 2020
Opening balance as at 1 July 2019	737	824	11	(22)	1,550
Audited profit for the year	-	57	-	-	57
Other comprehensive income
Movement in fair value of investment securities (net of tax)	-	-	13	-	13
Cash flow hedges (net of tax)	-	-	-	(22)	(22)
Total other comprehensive income	-	-	13	(22)	(9)
Total comprehensive income	-	57	13	(22)	48
Transactions with owners
Dividends paid on ordinary shares	-	(17)	-	-	(17)
Distributions to holder of perpetual capital	-	(11)	-	-	(11)
Audited balance at 30 June 2020	737	853	24	(44)	1,570
Opening balance as at 1 July 2020	737	853	24	(44)	1,570
Unaudited 6 months ended 31 December 2020
Unaudited profit for the period	-	55	-	-	55
Other comprehensive income
Movement in fair value of investment securities (net of tax)	-	-	(5)	-	(5)
Cash flow hedges (net of tax)	-	-	-	27	27
Total other comprehensive income	-	-	(5)	27	22
Total comprehensive income	-	55	(5)	27	77
Transactions with owners
Dividends paid on ordinary shares	-	-	-	-	-
Distributions to holder of perpetual capital	-	(3)	-	-	(3)
Unaudited balance at 31 December 2020	737	905	19	(17)	1,644

The notes to the financial statements form an integral part of, and should be read in conjunction with, these financial statements.

Kiwibank Limited

Interim financial statements continued

Balance sheet

As at 31 December 2020

		Unaudited	Unaudited1	Audited1
Dollars in millions	Note	31/12/20	31/12/19	30/06/20
Assets
Cash and cash equivalents		997	561	492
Due from related parties	18	81	79	77
Due from other financial institutions	8	193	246	105
Investment securities		1,610	1,116	1,895
Derivative financial instruments		295	308	434
Loans and advances	4	23,809	21,528	22,230
Property, plant and equipment		54	51	49
Right-of-use assets	16	111	80	95
Deferred taxation		33	19	43
Intangible assets	15	60	64	60
Other assets		40	39	38
Total assets		27,283	24,091	25,518
Total interest earning and discount bearing assets		26,476	23,391	24,711
Liabilities
Due to other financial institutions	9	336	141	317
Due to related parties	18	3	4	7
Deposits and other borrowings	10	21,891	19,217	20,597
Derivative financial instruments		314	296	400
Debt securities issued	11	2,476	2,463	2,229
Current tax liability		-	4	23
Lease liabilities	16	119	81	97
Contract liabilities		7	24	10
Other liabilities		72	122	118
Subordinated debt	12	421	150	150
Total liabilities		25,639	22,502	23,948
Total interest and discount bearing liabilities		20,996	19,144	19,930
Shareholder's equity
Share capital		737	737	737
Reserves		907	852	833
Total shareholder's equity		1,644	1,589	1,570
Total liabilities and shareholder's equity		27,283	24,091	25,518

1 In the current period, when the provision for credit impairment exceeds the carrying amount of drawn balances, the excess has been presented as ‘Other liabilities’ to reflect the expected credit loss for undrawn commitments. Comparatives have been restated to align with the current year presentation and the requirements of NZ IFRS 7. Therefore ‘Loans and advances’ and ‘Other liabilities’ as at 31 December 2019 and 30 June 2020 have been increased by $5m and $8m, respectively.

The notes to the financial statements form an integral part of, and should be read in conjunction with, these financial statements.

Kiwibank Limited

Interim financial statements continued

Cash flow statement

For the six months ended 31 December 2020

	Unaudited	Unaudited	Audited
	6 months	6 months	year
	ended	ended	ended
Dollars in millions	31/12/20	31/12/191	30/06/20
Cash flows from operating activities
Interest received	408	477	932
Interest paid	(185)	(244)	(454)
Fees and other income received	73	98	164
Direct fee expenses paid	(43)	(52)	(96)
Operating expenses paid	(230)	(174)	(375)
Taxes paid	(44)	(17)	(21)
Net cash flows from operating activities before
changes in operating assets and liabilities	(21)	88	150
Net changes in operating assets and liabilities
Investment securities	281	55	(696)
Loans and advances	(1,556)	(1,086)	(1,853)
Balances due from related parties	(8)	1	6
Balances due from other financial institutions	(88)	(175)	(34)
Deposits and other borrowing	1,340	987	2,377
Balances due to other financial institutions	19	15	191
Contract liabilities	-	(3)	-
Net cash flows from operating activities	(33)	(118)	141
Cash flows from investing activities
Purchase of property, plant and equipment	(9)	(6)	(10)
Purchase of intangible assets	(10)	(1)	(12)
Net cash flows from investing activities	(19)	(7)	(22)
Cash flows from financing activities
Issue of debt securities	946	1,081	1,627
Redemption of debt securities	(656)	(694)	(1,537)
Payment of principal portion of lease liabilities	(7)	(6)	(12)
Receipt of lease incentives	6	-	-
Issue of subordinated debt	275	-	-
Repayment of subordinated debt	-	(100)	(100)
Dividends paid on ordinary shares	-	(11)	(17)
Distributions paid to holder of perpetual capital	(3)	(5)	(11)
Net cash flows from financing activities	561	265	(50)
Increase/(decrease) in cash and cash equivalents	509	140	69
Cash and cash equivalents at beginning of the period/year	492	421	421
Effect of exchange translation adjustments	(4)	-	2
Cash and cash equivalents at end of the period/year	997	561	492

1 The presentation of debt securities has been adjusted to reflect issue of debt securities and redemption of debt securities as separate line items rather than as a net movement. The 31 December 2019 comparative has been reclassified for consistency with the current period’s presentation. This classification also identified a restatement resulting in $6m of interest paid and $3m of loans and advances within net cash flows of operating activities and an offsetting $9m decrease in net cash flows from financing activities.

The notes to the financial statements form an integral part of, and should be read in conjunction with, these financial statements.

Kiwibank Limited

Notes to the interim financial statements

1. Summary of significant accounting policies

1.1 Reporting entity

These consolidated interim financial statements are presented for the “Banking Group”, which consists of Kiwibank Limited (“Kiwibank” or the “Bank”) and its subsidiaries. Kiwibank is a for-profit entity incorporated and domiciled in New Zealand under the Companies Act 1993 and is registered as a bank under the Reserve Bank of New Zealand Act 1989.

The principal activity of the Banking Group is the provision of banking products and services to individuals and small to mediumsized businesses.

Kiwibank's immediate parent company is Kiwi Group Holdings Limited (“KGHL”). KGHL is owned by New Zealand Post Limited (“NZP”) (53%), NZSF Tui Investments Limited ("NZSF") (25%) and Accident Compensation Corporation ("ACC") (22%). The ultimate holding company of Kiwibank is NZP whose address for service is: Ground Floor, New Zealand Post House, 7 Waterloo Quay, Wellington 6011, New Zealand. The ultimate shareholder of Kiwibank is the New Zealand Crown (the “Crown”).

1.2 Basis of preparation

These interim financial statements are for the Banking Group for the six months ended 31 December 2020 and have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand, as appropriate for for-profit entities. They comply with NZ IAS 34 Interim Financial Reporting , IAS 34 Interim Financial Reporting and the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended) (the “Order”). The financial statements have been reviewed, not audited. These interim financial statements should be read in conjunction with the Banking Group’s financial statements for the year ended 30 June 2020.

Measurement base

These interim financial statements are based on the general principles of historic cost accounting, modified by the application of fair value measurements for financial instruments held at fair value through other comprehensive income, financial instruments held at fair value through profit or loss and derivatives used for hedging. The carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and otherwise carried at amortised cost, are adjusted to record changes in fair value attributable to the risks that are being hedged.

1.3 Accounting policies

The accounting policies adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the Banking Group’s annual financial statements for the year ended 30 June 2020.

1.3.1 Interest Rate Benchmark Reform

Interest rate benchmarks such as interbank offered rates (IBORs) play an important role in financial markets. Market developments have undermined confidence in the reliability and robustness of some interest rate benchmarks resulting in market-led working groups in several jurisdictions reviewing major interest rate benchmarks. In some jurisdictions, there has been clear progress towards the replacement of interest rate benchmarks with the alternative, nearly risk-free interest rates that are based on transaction data. These reforms have led to uncertainty about the long-term viability of some interest rate benchmarks beyond 1 January 2022.

The Banking Group continues to monitor the developments and expected impacts of the Interest Rate Benchmark Reform. The Banking Group’s hedging activities expose it to CHF LIBOR which is subject to cessation. The notional value of the Banking Group’s IBOR exposures designated in hedge accounting relationships maturing after 31 December 2021, which will be impacted by the Interest Rate Benchmark Reform is CHF150m. The extent of the risk exposure also reflects the notional value of the associated hedging instruments.

1.3.2 Impact of COVID-19 pandemic on judgements and estimates

The Banking Group continues to assess the impact of the COVID-19 pandemic on accounting judgements and estimates. There have been no material changes in the judgements and estimates applied from 30 June 2020. However, the model inputs, economic scenario weightings, and model overlay assumptions used in calculating expected credit losses have been updated to reflect the latest information available. These revised judgements and estimates are detailed in Note 5.

1.4 Basis of consolidation

The consolidated interim financial statements of the Banking Group comprise the interim financial statements of Kiwibank and its subsidiaries for the period ended 31 December 2020, using the acquisition method. Subsidiaries are entities that are controlled by Kiwibank.

Kiwibank Limited

Notes to the interim financial statements continued

1. Summary of significant accounting policies continued

1.5 Functional and presentation currency

The Banking Group’s interim financial statements are presented in New Zealand dollars which is the Bank’s functional and presentation currency. All amounts are expressed in millions of New Zealand dollars, unless otherwise stated.

1.6 Comparative amounts

Certain amounts in the comparative information have been reclassified or amended to ensure consistency with the current period’s presentation. Changes are disclosed within impacted notes where relevant.

2. Net gains on financial instruments

	Unaudited	Unaudited	Audited
	6 months	6 months	year
	ended	ended	ended
Dollars in millions	31/12/20	31/12/19	30/06/20
Financial instruments held for trading	-	-	-
Financial instruments held at fair value through profit or loss	(1)	-	-
Net ineffectiveness on qualifying fair value hedges	-	-	1
Cumulative gain transferred from fair value reserve	3	3	3
Cumulative loss transferred from cash flow hedge reserve	-	-	-
Cumulative gain on financial liabilities at amortised cost	-	-	3
Net foreign exchange gains	2	3	6
Total net gains on financial instruments	4	6	13

Net ineffectiveness on qualifying cash flow hedges is $nil (31 December 2019: $nil; 30 June 2020: $nil). Net ineffectiveness on qualifying fair value hedges is $0.03m (31 December 2019: $0.4m; 30 June 2020: $0.4m).

3. Net fee and other income and contracts with customers

	Unaudited	6 months ended
Dollars in millions	Personal	Business	Total
Major service categories
Lending services	3	1	4
Card services	51	1	52
Transactional account and other services	16	3	19
Agency services	-	1	1
Total revenue from contracts with customers	70	6	76
Other income	-	-	-
Gross fee and other income	70	6	76
Direct fee expenses	(42)	(1)	(43)
Total net fee and other income	28	5	33

The Banking Group sold the Prezzy card business to epay New Zealand Limited (epay) on 29 November 2019 with a transitional agreement in place whereby Kiwibank operated parts of the business on behalf of epay for an ongoing fee until epay could take on the full operation and issuance of the cards. On 27 November 2020 the full operation and issuance of Prezzy cards was transitioned to epay. The marketing and distribution of the Prezzy card was managed by epay from the sale date.

There was no income recognised within other income in relation to the gain on sale in the six months ended 31 December 2020 (30 June 2020: $12.0m, 31 December 2019: $12.0m).

Kiwibank Limited

Notes to the interim financial statements continued

3. Net fee and other income and contracts with customers continued

Reconciliation to segment reporting

	Unaudited	6 months ended
Dollars in millions	Personal	Business	Total
Net interest income	152	98	250
Net gains on financial instruments	(1)	5	4
Gross fee and other income	70	6	76
Direct fee expenses	(42)	(1)	(43)
Total revenue (as reported in segment analysis in note 20)	179	108	287

	Unaudited 6 months ended 31/12/19	Unaudited 6 months ended 31/12/19
Dollars in millions	Personal	Business	Total
Major service categories
Lending services	4	2	6
Card services	57	1	58
Transactional account and other services	16	3	19
Agency services	2	1	3
Total revenue from contracts with customers	79	7	86
Other income	12	-	12
Gross fee and other income	91	7	98
Direct fee expenses	(51)	(1)	(52)
Total net fee and other income	40	6	46

Reconciliation to segment reporting

	Unaudited 6 months ended 31/12/19	Unaudited 6 months ended 31/12/19
Dollars in millions	Personal	Business	Total
Net interest income	144	81	225
Net gains on financial instruments	1	5	6
Gross fee and other income	91	7	98
Direct fee expenses	(51)	(1)	(52)
Total revenue (as reported in segment analysis in note 20)	185	92	277

Kiwibank Limited

Notes to the interim financial statements continued

3. Net fee and other income and contracts with customers continued

	Audited year ended 30/06/20	Audited year ended 30/06/20
Dollars in millions	Personal	Business	Total
Major service categories
Lending services	6	4	10
Card services	118	1	119
Transactional account and other services	31	6	37
Agency services	1	2	3
Total revenue from contracts with customers	156	13	169
Other income	12	-	12
Gross fee and other income	168	13	181
Direct fee expenses	(94)	(2)	(96)
Total net fee and other income	74	11	85

Reconciliation to segment reporting

	Audited year ended 30/06/20	Audited year ended 30/06/20
Dollars in millions	Personal	Business	Total
Net interest income	287	168	455
Net gains on financial instruments	2	11	13
Gross fee and other income	168	13	181
Direct fee expenses	(94)	(2)	(96)
Total revenue (as reported in segment analysis in note 20)	363	190	553

4. Loans and advances

The table below presents gross loans and advances by type of product. Total gross residential mortgage loans at 31 December 2020 were $21,544m (31 December 2019: $19,725m, 30 June 2020: $20,315m). This includes term loans – housing and other residentially secured lending included within other term lending (see note 5).

	Unaudited	Unaudited1	Audited1
	as at	as at	as at
Dollars in millions	31/12/20	31/12/19	30/06/20
Overdrafts	103	98	107
Credit card outstandings	408	461	389
Term loans - housing	20,584	18,799	19,377
Other term lending	2,575	2,010	2,234
Other lending	213	196	201
Gross loans and advances	23,883	21,564	22,308
Provision for credit impairment	(74)	(36)	(78)
Fair value hedge adjustments	-	-	-
Total net loans and advances	23,809	21,528	22,230
Current	1,550	1,744	1,517
Non-current	22,259	19,784	20,713

Kiwibank Limited

Notes to the interim financial statements continued

4. Loans and advances continued

Business Finance Guarantee Scheme

The Minister of Finance established the Business Finance Guarantee Scheme (the “Scheme”) in April 2020 to help banks support New Zealand businesses facing hardship as a consequence of COVID-19 via an indemnity pursuant to section 65ZD of the Public Finance Act 1989.

On 20 August 2020, the Bank entered into a new deed of indemnity allowing the Bank to lend up to $5,000,000 to qualifying borrowers for a maximum of five years. Subject to compliance with the terms of the deed, the Crown will pay 80% of any loss incurred by the Bank on loans made under this scheme, with the remaining 20% carried by the Bank. There are no other limits on the amount of the obligations guaranteed.

On 15 December 2020, a new deed of indemnity was executed extending the availability period to 30 June 2021. While a number of new conditions were agreed including changes to the refinancing clauses, the Crown have maintained their 80% loss sharing agreement on compliant loans.

The amount of loans issued under this scheme are disclosed within note 5.

5. Asset quality

Credit impairment (losses)/reversals recognised in income statement

	Unaudited 6 months ended 31/12/20	Unaudited 6 months ended 31/12/20	Unaudited 6 months ended 31/12/20
	Retail	Residential
	unsecured	mortgage	Business
Dollars in millions	lending	loans	exposures	Total
Credited/(charged) to the income statement for collectively assessed provisions	4	(2)	-	2
(Charged)/credited to the income statement for individually assessed provisions	-	1	(1)	-
Amounts written off directly to the income statement	(3)	-	-	(3)
Recovery of amounts previously written off	1	-	-	1
Total credit impairment reversals/(losses) per income statement	2	(1)	(1)	-

	Unaudited 6 months ended 31/12/19	Unaudited 6 months ended 31/12/19	Unaudited 6 months ended 31/12/19
	Retail	Residential
	unsecured	mortgage	Business
Dollars in millions	lending	loans	exposures	Total
(Charged)/credited to the income statement for collectively assessed provisions	(1)	1	(2)	(2)
(Charged)/credited to the income statement for individually assessed provisions	-	-	(1)	(1)
Amounts written off directly to the income statement	(4)	-	-	(4)
Recovery of amounts previously written off	2	-	-	2
Total credit impairment (losses)/reversals per income statement	(3)	1	(3)	(5)

		Audited year ended 30/06/20	Audited year ended 30/06/20
	Retail	Residential
	unsecured	mortgage	Business
Dollars in millions	lending	loans	exposures	Total
(Charged)/credited to the income statement for collectively assessed provisions	(9)	(25)	(13)	(47)
(Charged)/credited to the income statement for individually assessed provisions	-	-	(1)	(1)
Amounts written off directly to the income statement	(7)	-	-	(7)
Recovery of amounts previously written off	4	-	-	4
Total credit impairment (losses)/reversals per income statement	(12)	(25)	(14)	(51)

Recovery of amounts previously written off are recognised directly in the income statement and there is no related movement in provisions when amounts are recovered.

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Impact of COVID-19 on provision for credit impairment for the six months ended 31 December 2020

COVID-19 continues to have a significant impact on global and domestic economies and a direct impact on the Banking Group’s customers. At the date of this Disclosure Statement, community transmission is under control in New Zealand and a number of vaccines are likely to be deployed over the coming months which should reduce future transmission risks. While that position is encouraging, the opportunity for a resurgence of the virus remains as indicated by recent quarantine facility issues and by the current experience of many of New Zealand’s major trading partners. As a result, there remains considerable uncertainty around the short and medium-term outlook for the global and domestic economies. These differing economic scenarios and the potential impacts on our customers influence the inputs used in the expected credit loss (“ECL”) model. An updated explanation of the specific areas of uncertainty and judgement due to COVID-19 for the six months ended 31 December 2020 are described in more detail below.

For the six months to 31 December 2020, Kiwibank customers had access to a range of support packages. Mortgage lending support was primarily provided through the mortgage payment deferral scheme which was available to all Retail and Small Business customers. Customers with unsecured lending products also had access to lending support if they were directly affected by COVID-19. In addition, Business customers had access to various government assistance schemes including wage subsidies (now ended) as well as the Business Finance Guarantee Scheme and the IRD’s Small Business Cashflow loan scheme. These lending support options continue to provide valued assistance to our customers facing COVID-19 related impacts to their incomes.

The following tables show the total drawn exposure and number of customers provided with lending support packages related to COVID-19 as at 31 December 2020:


Unaudited as at 31/12/20	Audited as at 30/06/20
Total Total
Drawn exposure ($m) Number of customers Drawn exposure ($m) Number of customers
COVID-19 Interest Only 202 504 1,063 3,147 COVID-19 Repayment Deferral 83 183 848 2,197 COVID-19 Term Extension 19 84 19 81 Credit Card Assistance 1 109 4 475 Retail Overdraft Package - 51 - 651 Business Finance Guarantees 22 98 8 51
Total 327 1,029 1,942 6,602

==> picture [520 x 270] intentionally omitted <==

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

The bar chart on the previous page shows the total level of drawn exposure outstanding monthly on support packages since the onset of COVID-19. As the data shows, drawn exposures peaked in May 2020 and have materially reduced. The reductions have slowed over the last three months ended 31 December 2020. Despite the fall in drawn exposures with COVID-19 lending support, the Bank has not seen an increase in traditional indicators of increased credit risk (excesses, delinquencies and impairments). The Bank believes these indicators continue to be affected by the extensive credit support provided by both the Bank and Government. As a result, the full impacts of COVID-19 on the Bank’s customers are not evident in the ECL model outputs. As such the COVID-19 model overlays have been largely retained and this is discussed in further detail below.

Key changes in ECL provisions

The following table summarises the provision movements in the six months ended 31 December 2020 due to changes in model inputs, changes in scenario weightings (included within the modelled ECL movements), and through adjustments to model overlays.

	Individually	Collectively assessed provisions	Collectively assessed provisions
	assessed			Total
Dollars in millions	provisions	Modelled ECL	Model overlays	provision
Audited as at 30 June 2020	2	58	26	86
Movement	(1)	2	(4)	(3)
Unaudited as at 31 December 2020	1	60	22	83

While most mortgage customers who were initially provided COVID-19 lending support have now restored their loans to a principal and interest basis, a number of customers continue to experience a material loss of income due to COVID-19. Those customers on COVID-19 deferred payment mortgages with approved deferred payments extensions beyond the initial 6-month period have been transitioned to ECL stage 2 due to the deterioration in their credit status. The additional collective provision resulting from that transition was largely offset by a release from the mortgage COVID-19 overlay.

With respect to COVID-19 overlays, the potential COVID-19 impact on Kiwibank’s mortgage and business customers has been reviewed and remodeled to reflect a probability weighted assessment of outcomes across four COVID-19 impact scenarios. Those scenarios model the impact on provisions of differing levels of mortgage and business customer exposures transitioning between the ECL stages based on new requests for COVID-19 related support, requests for an extension of existing COVID-19 support and estimates of the COVID-19 supported exposures that will be recognised as impaired once the COVID-19 supported lending arrangements end on 31 March 2021. That modelling was informed by the experience of the global financial crisis between 2007 and 2009 where impairment peaked 18-24 months after the trigger event, although that peak may take longer to appear in this instance due to the levels of credit support provided and the lower interest rates applying currently.

Specific changes in ECL model assumptions, inputs and model overlays are discussed in more detail below. Other than the changes outlined below, no material changes to models or to other management overlays have been implemented in the 6 months to 31 December 2020.

Changes in ECL model assumptions and inputs

The modelled provision for expected credit losses is an estimate of forward-looking losses based on the Banking Group’s view of four different economic scenarios. These economic scenarios have been reassessed as more data has become available on the actual impacts of COVID-19 on the economy over the last six months.

The Bank has updated the economic scenario assumptions to recognise changes in both the domestic and global economies compared to the previous scenario assumptions used as at 30 June 2020. Given the effectiveness of Bank credit support and Government fiscal and monetary initiatives over the last six months, the latest scenarios are less severe than those previous forecasts. The key changes in underlying macro-economic assumptions and weightings used at 31 December 2020 compared to 30 June 2020 are presented on the following page.

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Scenario	Unaudited as at 31/12/20 Audited as at 30/06/20
Central COVID-19 Single extended lockdown	Real GDP GDP falls 2.7% over the year to 31 December 2020, recovering to pre-COVID-19 levels early in 2022. GDP falls 18.3% YoY in June 2020 quarter and doesn't return to 2020 levels until 2022.
	Unemployment Unemployment reduces slowly from an early 2021 peak of 6.5% to 5.2% by the end of 2023. Unemployment reduces slowly from 9.8% to 5.3% by 2023.
	House price index Annual house price growth slows to 3.7% per annum by the end of 2021 before starting to recover. House prices fall ~10% from pre-lockdown levels and are slow to recover.
Upside COVID-19 Single lockdown event	Real GDP GDP falls 2.1% over the year to 31 December 2020, recovering to pre-COVID-19 levels in early 2022. Economy recovers more quickly than in the Central scenario with GDP returning to 2020 levels by mid-2021.
	Unemployment Unemployment reduces slowly from a mid- year peak of 6.4% in 2021 to 5.3% by 2023. Unemployment peaks at 9% and then reduces slowly.
	House price index Annual house price growth slows to 2.1% by the end of 2021 before starting to recover. House prices fall ~10% from pre-lockdown levels recovering by end of 2022.
Downside COVID-19 Multiple lockdowns	Real GDP GDP falls 2.7% over the year to 31 December 2020, lower growth sees GDP returning to pre-COVID-19 levels in the second half of 2022. GDP recovers more slowly from COVID-19 due to a second (and subsequent) round of infection requiring further periods of lockdown.
	Unemployment Unemployment reduces slowly from a peak of 8.3% in early 2022 to 6.0% by 2023. Unemployment peaks at 13.4% before falling slowly to <8% by the second half of 2023.
	House price index Annual house price growth slows to 0% by mid-2022. House prices fall ~20% from their peak and don't recover to pre-lockdown levels by 2023.
Severe stress Regulator stress test with extended recession	Real GDP GDP falls 0.9% over 2021, followed by a further 2.6% fall over 2022. Annual average GDP growth falls to -2% by the second year of the scenario, not recovering to the starting level until the end of year 3.
	Unemployment Unemployment increases to a peak of 11.4% in late 2022 with minimal recovery in 2023. Unemployment increases and peaks above 10%.
	House price index House prices decrease ~35% from their peak. House prices decrease ~35% from their peak.

The weightings applied to each scenario have been reviewed and are amended from the weightings applied at 30 June 2020. The weightings as at 31 December 2020 reflect an assessment that downside risks are slightly higher than those applied previously. This is due to:

the potential for a resurgence in the virus given greater global incidence and more infectious variants,
the possibility of delays in implementing the vaccination programme,
the risk that vaccines may not be as effective as expected for COVID-19 and the variants now appearing, and
the deterioration in global economic outcomes now expected for calendar year 2021.

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

The weightings applied to the scenarios in the calculation of the ECL as at 31 December 2020 are outlined below:

Scenario weighting applied	Unaudited as at 31/12/20	Audited as at 30/06/20
Central	35%	40%
Upside	10%	10%
Downside	40%	40%
Severe stress	15%	10%

Changes in model overlays from 30 June 2020

Model overlays are required in circumstances where it is judged that the existing inputs, assumptions and model techniques do not capture all the risk factors relevant to the Banking Group’s lending portfolios. The Bank holds a number of overlays reflecting credit risks that are not yet incorporated into ECL models due to data gaps in limited loss histories, limitations in model design and for risk drivers the Bank is unable to currently estimate with sufficient precision.

Dollars in millions	Unaudited as at 31/12/20	Audited as at 30/06/20
COVID-19 model overlays1
Mortgage	12	14
Business	3	6
Other model overlays	7	6
Total model overlays	22	26

1 The overlay reduction for both mortgages and business reflects an offset to the increase in modelled provisions that occurred as exposures were migrated from stage 1 to stage 2.

As per the March 2020 guidance from the International Accounting Standards Board, the Bank initially looked through the shortterm liquidity impacts resulting from the economic lockdown and did not automatically move customer exposures subject to COVID-19 lending support into stage 2 for the provision calculation. At 30 June 2020 the Banking Group’s COVID-19 overlay was calculated on the assumption that a proportion of impacted customers would ultimately experience arrears, hardship or default without the various support arrangements in place. The mortgage overlay is now calculated on a probability weighted estimate of the impact on provisions as COVID-19 impacted exposures migrate between ECL stages under the four scenarios.

As at 31 December 2020, mortgages are now treated as ‘credit distressed’ where customers have sought a second 6-month period of deferred payments. The Bank has moved these exposures into stage 2 for the ECL calculation. The resulting increase in ECL has been partially offset by releases of the COVID-19 overlay previously allocated to mortgage lending. It is expected that more customers will transition to stage 2 as additional payment deferral requests are sought and approved although subsequent requests for deferred payment support are expected to result in the exposure becoming impaired. At this point, COVID-19 interest only lending that is further extended at the customer’s request continues to be treated as fully performing (stage 1). We continue to monitor the credit performance of this lending cohort but expect to transition these exposures to stage 2 if subsequent requests for interest only support are made.

The Bank’s Business COVID-19 overlay is also now calculated on a probability weighted estimate of the impact on provisions as COVID-19 impacted exposures migrate between ECL stages under the four scenarios. Any business exposure downgraded directly due to COVID-19 has increased ECL, offset by a release from the previously calculated Business COVID-19 overlay.

Sensitivity of ECL to key judgements and assumptions

The uncertain evolution of the COVID-19 pandemic increases the risk that the forecast assumptions applied will result in an understatement or overstatement of the provision for credit impairment. Given this uncertainty, and as the impact of judgements is significant, a sensitivity analysis is included below to outline the impact of applying different scenario weightings and overlay assumptions on the level of ECL.

The following table outlines the sensitivity of ECL by giving each economic scenario a 100% weighting and adjusting the forecast assumptions applied for the calculation of the COVID-19 overlay accordingly while holding all other modelling factors constant.

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Unaudited as at 31/12/2020 Audited as at 30/06/2020	Unaudited as at 31/12/2020 Audited as at 30/06/2020
Dollars in millions Total ECL Impact	Total ECL Impact
Reported probability-weighted ECL 83 - 86 - 100% upside scenario ECL 59 (24) 52 (34) 100% central scenario ECL 74 (9) 77 (9) 100% downside scenario ECL 91 8 99 (13) 100% severe stress ECL 109 26 112 26

The sensitivity outlined above represents the Banking Group’s best estimate of the range of reasonably plausible outcomes but, due to economic uncertainty, the actual range might be significantly greater. The key difference between the ECL sensitivity estimates between 30 June 2020 and 31 December 2020 relate to the lower unemployment forecasts and the higher forecast track of house prices within each of the updated scenarios. Those changes reflect the actual track of both of those macroeconomic drivers over the last 6 months.

Summary of lending

		Unaudited as at 31/12/20	Unaudited as at 31/12/20
	Retail	Residential
	unsecured	mortgage	Business
Dollars in millions	lending	loans	exposures	Total
Neither past due nor impaired	414	21,478	1,889	23,781
Past due but not impaired	17	66	18	101
Impaired	-	-	1	1
Gross loans and advances	431	21,544	1,908	23,883
Provision for credit impairment	(13)	(39)	(22)	(74)
Fair value hedge adjustments	-	-	-	-
Net loans and advances	418	21,505	1,886	23,809

In the current period, when the provision for credit impairment exceeds the carrying amount of drawn balances, the excess has been presented as ‘Other liabilities’ to reflect the expected credit loss for undrawn commitments. Comparatives have been restated to align with the current year presentation and the requirements of NZ IFRS 7. Therefore ‘Loans and advances’ and ‘Other liabilities’ as at 31 December 2019 and 30 June 2020 have been increased by $5m and $8m, respectively.

Loans and advances past due but not impaired

		Unaudited as at 31/12/20	Unaudited as at 31/12/20
	Retail	Residential
	unsecured	mortgage	Business
Dollars in millions	lending	loans	exposures	Total
Past due less than 30 days	14	47	9	70
Past due 30 - 59 days	2	9	4	15
Past due 60 - 89 days	1	3	1	5
Past due 90 days or greater	-	7	4	11
Total past due but not impaired	17	66	18	101

Other asset quality information

		Unaudited as at	31/12/20
	Retail	Residential
	unsecured	mortgage	Business
Dollars in millions	lending	loans	exposures	Total
Undrawn lending commitments to counterparties with individually impaired
	-	-	-	-
assets
Other assets under administration	-	-	1	1

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Movement in provision for credit impairment and gross carrying amount

The following pages include tables summarizing the movements in provision for credit impairment split by category of retail unsecured lending, residential mortgage loans and business exposures. Aggregate information for all categories is presented also.

The movement tables are presented on the following basis:

Additions are amounts drawn from new or existing facilities during the year.
Deletions are amounts repaid during the year.
Transfers between ECL stages show the impact of the initial transfer
Net remeasurement of loss allowance includes the subsequent increase or decrease of the provision for the transferred amounts and the net impact of changes in credit quality of existing lending.
Other changes in ECL includes the impact of non-significant changes in the credit quality of existing lending, changes in future forecast assumptions and other model or overlay changes.

Movement in provision for credit impairment - retail unsecured lending exposures

			Unaudited 6 months ended 31/12/20	Unaudited 6 months ended 31/12/20	Unaudited 6 months ended 31/12/20
		Stage 1	Stage 2	Stage 3
		Collectively	Collectively	Collectively	Individually
Dollars in millions		assessed	assessed	assessed	assessed	Total
Total provision for loans and commitments at beginning of period - retail unsecured lending		8	9	2	-	19
Transfers between stages:
- Transferred to Stage 1		2	(2)	-	-	-
- Transferred to Stage 2		-	1	(1)	-	-
- Transferred to Stage 3		-	-	-	-	-
- Transferred to Stage 3 individually assessed		-	-	-	-	-
Total transfers between stages		2	(1)	(1)	-	-
(Credited)/charged to income statement for collectively
assessed provisions
- Net remeasurement of loss allowances		(2)	2	-	-	-
- Changes due to additions and deletions		-	(1)	-	-	(1)
- Changes due to amounts written off		-	(2)	-	-	(2)
- Other changes		-	(1)	-	-	(1)
Total (credited)/charged to income statement assessed provisions	for collectively	(2)	(2)	-	-	(4)
Charged/(credited) to income statement for individually
assessed provisions
- New and increased provisions		-	-	-	-	-
- Write-back of provisions no longer required		-	-	-	-	-
Total charged/(credited) to income statement	for
		-	-	-	-	-
individually assessed provisions
Amounts written off from individually assessed provisions		-	-	-	-	-
Total provision for loans and commitments at end of period - retail unsecured lending		8	6	1	-	15
Presented as:
- Provision for credit impairment on loans		6	6	1	-	13
- Provision for credit impairment on undrawn	commitments	2	-	-	-	2
Total provision for loans and commitments at end of period - retail unsecured lending		8	6	1	-	15

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Impact of changes in gross carrying amount and credit commitments on ECL - retail unsecured lending exposures

		Unaudited	6 months ended	31/12/20
	Stage 1	Stage 2	Stage 3
	Collectively	Collectively	Collectively	Individually
Dollars in millions	assessed	assessed	assessed	assessed	Total
Gross carrying amount - retail unsecured lending
Balance at the beginning of period	300	105	4	-	409
Net transfers between stages	5	(3)	(2)	-	-
Additions	112	21	-	-	133
Deletions	(88)	(19)	(1)	-	(108)
Amounts written off	-	(3)	-	-	(3)
Gross carrying amount at the end of period - retail unsecured lending	329	101	1	-	431
Off-balance sheet credit commitments - retail unsecured lending
Balance at the beginning of period	932	35	-	-	967
Net transfers between stages	(2)	2	-	-	-
Additions	98	9	-	-	107
Deletions	(138)	(16)	-	-	(154)
Off-balance sheet credit commitments at the end of period - retail unsecured lending	890	30	-	-	920

An explanation of how significant changes in the gross carrying amount of financial assets for retail unsecured lending exposures during the period have contributed to changes in the provision for credit impairment is outlined below.

Overall, credit impairment provisions for retail unsecured lending exposures reduced by $4m.

Stage 1 collectively assessed – there was no material movement in collective provisions. A net provision transition to stage 1 of $2m resulted in a remeasurement release of $2m and the growth in drawn balances was offset by a decrease in undrawn facilities.
Stage 2 collectively assessed – total stage 2 drawn balances decreased by $4m along with a $5m reduction in undrawn limits. The reduced level of exposures along with economic scenario changes led to a $2m reduction in stage 2 collective provisions. Overall credit quality improved resulting in a net $1m reduction in stage 2 collective provisions, which was offset by a $2m remeasurement of loans that were new to stage 2. $3m of gross balances were written off from stage 2 which released another $2m of stage 2 lifetime ECL.
Stage 3 collectively assessed – drawn balances reduced from $4m to $1m over the period as customers with COVID-19 support packages repaid these arrangements which resulted in a decrease of $1m in provisions.
Stage 3 individually assessed – there was no material movement in balances or individually assessed provisions.

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Movement in provision for credit impairment – residential mortgage loan exposures

				Unaudited 6	months ended 31/12/20	months ended 31/12/20
			Stage 1	Stage 2	Stage 3
			Collectively	Collectively	Collectively	Individually
Dollars in millions			assessed	assessed	assessed	assessed	Total
Total provision for loans and commitments at period – residential mortgage loans	beginning of		32	5	2	1	40
Transfers between stages:
- Transferred to Stage 1			1	(1)	-	-	-
- Transferred to Stage 2			-	1	(1)	-	-
- Transferred to Stage 3			-	-	-	-	-
- Transferred to Stage 3 individually assessed			-	-	-	-	-
Total transfers between stages			1	-	(1)	-	-
(Credited)/charged to income statement for collectively
assessed provisions
- Net remeasurement of loss allowances			(1)	4	-	-	3
- Changes due to additions and deletions			2	2	-	-	4
- Changes due to amounts written off			-	-	-	-	-
- Other changes			(5)	-	-	-	(5)
Total (credited)/charged to income statement collectively assessed provisions		for	(4)	6	-	-	2
Charged/(credited) to income statement for individually
assessed provisions
- New and increased provisions			-	-	-	-	-
- Write-back of provisions no longer required			-	-	-	(1)	(1)
Total charged/(credited) to income statement individually assessed provisions		for	-	-	-	(1)	(1)
Amounts written off from individually assessed provisions			-	-	-	-	-
Total provision for loans and commitments – residential mortgage loans	at	end of period	29	11	1	-	41
Presented as:
- Provision for credit impairment on loans			27	11	1	-	39
- Provision for credit impairment on undrawn commitments			2	-	-	-	2
Total provision for loans and commitments – residential mortgage loans	at	end of period	29	11	1	-	41

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Impact of changes in gross carrying amount on ECL - residential mortgage loan exposures

		Unaudited	6 months ended	31/12/20
	Stage 1	Stage 2	Stage 3
	Collectively	Collectively	Collectively	Individually
Dollars in millions	assessed	assessed	assessed	assessed	Total
Gross carrying amount - residential mortgage loans
Balance at the beginning of period	19,645	654	15	1	20,315
Net transfers between stages	(120)	123	(3)	-	-
Additions	3,513	61	-	-	3,574
Deletions	(2,261)	(79)	(4)	(1)	(2,345)
Amounts written off	-	-	-	-	-
Balance at the end of period - residential mortgage loans	20,777	759	8	-	21,544
Off-balance sheet credit commitments – residential mortgage loans
Balance at the beginning of period	2,224	26	-	-	2,250
Net transfers between stages	(4)	4	-	-	-
Additions	730	8	-	-	738
Deletions	(565)	(10)	-	-	(575)
Off-balance sheet credit commitments at the end of period – residential mortgage lending	2,385	28	-	-	2,413

An explanation of how significant changes in the gross carrying amount of financial assets for residential mortgage loan exposures during the period have contributed to changes in the provision for credit impairment is outlined below.

Overall, credit impairment provisions for residential mortgage loan exposures increased by $1m.

Stage 1 collectively assessed – collective provisions decreased by $3m despite net lending growth of $1,132m. New loans attracted relatively low levels of ECL and were offset by reduced provisions from changes to economic scenarios and the release of COVID-19 overlays as loans approved for extended COVID-19 deferred payments were transitioned from stage 1 to stage 2.
Stage 2 collectively assessed – total stage 2 exposures increased $107m largely due to the migration of a portion of COVID-19 deferred payment loans from stage 1 along with increased non-COVID-19 instances of financial hardship. Those loan migrations resulted in stage 2 collective provisions increasing by $4m. Another $2m of collective provision was recognised in relation to new loans in stage 2.
Stage 3 collectively assessed – drawn balances within this stage 3 collectively assessed reduced from $15m to $8m resulting in provisions reducing by $1m.
Stage 3 individually assessed – drawn balances and specific provisions both dropped by $1m.

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Movement in provision for credit impairment – business exposures

			Unaudited 6 months ended	Unaudited 6 months ended	31/12/20
		Stage 1	Stage 2	Stage 3
		Collectively	Collectively	Collectively	Individually
Dollars in millions		assessed	assessed	assessed	assessed	Total
Total provision for loans and commitments at beginning of period – business exposures		16	7	3	1	27
Transfers between stages:
- Transferred to Stage 1		1	(1)	-	-	-
- Transferred to Stage 2		-	-	-	-	-
- Transferred to Stage 3		-	-	-	-	-
- Transferred to Stage 3 individually assessed		-	-	-	-	-
Total transfers between stages		1	(1)	-	-	-
(Credited)/charged to income statement for collectively
assessed provisions
- Net remeasurement of loss allowances		(1)	2	-	-	1
- Changes due to additions and deletions		4	-	(2)	-	2
- Changes due to amounts written off		-	-	-	-	-
- Other changes		(1)	(2)	-	-	(3)
Total (credited)/charged to income statement for collectively assessed provisions		2	-	(2)	-	-
Charged/(credited) to income statement for individually
assessed provisions
- New and increased provisions		-	-	-	2	2
- Write-back of provisions no longer required		-	-	-	(1)	(1)
Total charged/(credited) to income statement for individually assessed provisions		-	-	-	1	1
Amounts written off from individually assessed provisions		-	-	-	(1)	(1)
Total provision for loans and commitments at business exposures	end of period –	19	6	1	1	27
Presented as:
- Provision for credit impairment on loans		16	4	1	1	22
- Provision for credit impairment on undrawn commitments		3	2	-	-	5
Total provision for loans and commitments at business exposures	end of period –	19	6	1	1	27

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Impact of changes in gross carrying amount on ECL – business exposures

		Unaudited 6 months ended	Unaudited 6 months ended	31/12/20
	Stage 1	Stage 2	Stage 3
	Collectively	Collectively	Collectively	Individually
Dollars in millions	assessed	assessed	assessed	assessed	Total
Gross carrying amount - business exposures
Balance at the beginning of period	1,493	82	8	1	1,584
Net transfers between stages	(14)	14	-	-	-
Additions	620	10	2	1	633
Deletions	(278)	(24)	(6)	-	(308)
Amounts written off	-	-	-	(1)	(1)
Balance at the end of period - business exposures	1,821	82	4	1	1,908
Off-balance sheet credit commitments – business exposures
Balance at the beginning of period	592	14	-	1	607
Net transfers between stages	4	(4)	-	-	-
Additions	289	4	-	-	293
Deletions	(266)	(3)	-	(1)	(270)
Off-balance sheet credit commitments at the end of period – business exposures	619	11	-	-	630

An explanation of how significant changes in the gross carrying amount of financial assets for business exposures during the period have contributed to changes in the provision for credit impairment is outlined below.

Overall, credit impairment provisions for business exposures were unchanged over the period.

Stage 1 collectively assessed – collective provisions increased by $4m driven by a net increase of $355m in total exposures. Transitions from stage 2 to stage 1 due to improvements in credit quality allowed $1m of collective provisions to be released due to remeasurement. Economic scenario changes supported a further reduction of $1m in collective provisions.
Stage 2 collectively assessed – collective provisions decreased by $1m despite loan balances remaining unchanged. This decrease was largely due to lending transferred to stage 1. COVID-19 loans were remeasured in stage 2 increasing collective provisions by $2m, which was offset by a partial release of the COVID-19 overlay.
Stage 3 collectively assessed – collective provisions decreased by $2m due to a net $4m reduction in loan balances.
Stage 3 individually assessed – individually assessed provisions did not materially change with specific provisions on new impaired loans offsetting releases from loans written off or released.

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Movement in provision for credit impairment – total exposures

				Unaudited 6 months ended	Unaudited 6 months ended	31/12/20
			Stage 1	Stage 2	Stage 3
			Collectively	Collectively	Collectively	Individually
Dollars in millions			assessed	assessed	assessed	assessed	Total
Total provision for loans and commitments at period – total exposures	beginning of		56	21	7	2	86
Transfers between stages:
- Transferred to Stage 1			4	(4)	-	-	-
- Transferred to Stage 2			-	2	(2)	-	-
- Transferred to Stage 3			-	-	-	-	-
- Transferred to Stage 3 individually assessed			-	-	-	-	-
Total transfers between stages			4	(2)	(2)	-	-
(Credited)/charged to income statement for collectively
assessed provisions
- Net remeasurement of loss allowances			(4)	8	-	-	4
- Changes due to additions and deletions			6	1	(2)	-	5
- Changes due to amounts written off			-	(2)	-	-	(2)
- Other changes			(6)	(3)	-	-	(9)
Total (credited)/charged to income statement collectively assessed provisions		for	(4)	4	(2)	-	(2)
Charged/(credited) to income statement for individually
assessed provisions
- New and increased provisions			-	-	-	2	2
- Write-back of provisions no longer required			-	-	-	(2)	(2)
Total charged/(credited) to income statement		for
individually assessed provisions			-	-	-	-	-
Amounts written off from individually assessed provisions			-	-	-	(1)	(1)
Total provision for loans and commitments – total exposures	at	end of period	56	23	3	1	83
Presented as:
- Provision for credit impairment on loans (refer to note 4)			49	21	3	1	74
- Provision for credit impairment on undrawn commitments			7	2	-	-	9
Total provision for loans and commitments – total exposures	at	end of period	56	23	3	1	83

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Impact of changes in gross carrying amount on ECL – total exposures

		Unaudited	months ended 31/12/20	months ended 31/12/20
	Stage 1	Stage 2	Stage 3
	Collectively	Collectively	Collectively	Individually
Dollars in millions	assessed	assessed	assessed	assessed	Total
Gross carrying amount - total exposures
Balance at the beginning of period	21,438	841	27	2	22,308
Net transfers between stages	(129)	134	(5)	-	-
Additions	4,245	92	2	1	4,340
Deletions	(2,627)	(122)	(11)	(1)	(2,761)
Amounts written off	-	(3)	-	(1)	(4)
Balance at the end of period - total exposures	22,927	942	13	1	23,883
Off-balance sheet credit commitments – total exposures
Balance at the beginning of period	3,748	75	-	1	3,824
Net transfers between stages	(2)	2	-	-	-
Additions	1,117	21	-	-	1,138
Deletions	(969)	(29)	-	(1)	(999)
Off-balance sheet credit commitments at the end of period – total exposures	3,894	69	-	-	3,963

Credit quality of loans and advances neither past due nor impaired

A large portion of the credit exposures, such as residential mortgages, are secured. That is, the fair value of associated security is sufficient to ensure that the Banking Group will recover the entire amount owing over the life of the facility and there is reasonable assurance that collection efforts will result in payment of the amounts due in a timely manner.

The credit quality of loans and advances to customers that were neither past due nor impaired can be assessed by reference to the Bank’s credit scoring systems. At the origination of loans and advances to customers, retail advances are assessed on a combination of debt servicing ability, demographic characteristics and loan-to-valuation (“LVR”) ratios. Non-retail advances are individually risk-graded against similar characteristics. The behavioural credit characteristics are reviewed periodically for adverse changes during the loan’s life. Interest continues to be accrued on all loans. No interest has been foregone, except for certain customers with credit cards at 0% interest rates as part of Customer Care packages.

Credit quality of other financial assets

In addition to assessing impairment for loans and advances, the Banking Group has assessed impairment for cash and cash equivalents, due from other financial institutions, due from related parties, investment securities and other financial assets. All of these financial assets are considered of high credit quality and are neither past due nor impaired. The identified impairment loss for all other financial assets, excluding loans and advances, was immaterial.

Credit risk related adjustments on financial assets at fair value

Credit impairment losses of $0.1m were recognised through other comprehensive income in relation to expected credit losses on Investment Securities held at fair value through other comprehensive income in the period ended 31 December 2020 (31 December 2019: $0.0m; 30 June 2020: ($0.1m)).

Credit Valuation Adjustments (“CVA”) and Debit Valuation Adjustments (“DVA”) are included in the valuations of Derivative Financial Instruments and these adjustments are recognised within net gains on financial instruments on the income statement. A gain of $0.3m was recognised in the income statement related to CVA and DVA during the period ended 31 December 2020 (31 December 2019: a gain of $0.1m; 30 June 20: a loss of $0.4m).

Kiwibank Limited

Notes to the interim financial statements continued

5. Asset quality continued

Definitions

“Impaired asset” means any credit exposures against which an individually assessed provision has been recorded in accordance with NZ IFRS 9 – Financial instruments.

A “90-day past due asset” is any loan which has not been operated by the borrower within its key terms for at least 90 days and which is not an impaired asset.

An “asset under administration” is any credit exposure which is not an impaired asset or a past due asset, but is to a counterparty who is in receivership, liquidation, bankruptcy, statutory management or any form of administration. These are classified as “other assets under administration” and reported separately.

6. Concentration of credit risk

Concentrations of credit risk arise where the Banking Group is exposed to risk in activities or industries of a similar nature. An analysis of financial assets by industry sector at the reporting date is as follows:

Dollars in millions	Unaudited as at 31/12/20
	On-balance sheet financial assets Off-balance sheet commitments Total credit exposure
New Zealand Agriculture Food and other manufacturing Electricity, gas and water Construction Retail and wholesale trade Transport and storage Communications Finance, investment and insurance Property and business services Professional, scientific and technical services Government, local authorities and services Education Personal and other services Health and community services Households Overseas Finance, investment and insurance	18 3 21 190 67 257 15 3 18 448 260 708 191 77 268 235 22 257 17 12 29 719 38 757 1,623 138 1,761 92 31 123 1,666 1 1,667 16 5 21 95 21 116 144 24 168 20,727 3,251 23,978 863 10 873
Subtotal	27,059 3,963 31,022
Less provision for credit impairment Other financial assets	(74) (9) (83) 25 - 25
Total	27,010 3,954 30,964

Australian and New Zealand Standard Industrial Classification (“ANZSIC”) codes have been used as the basis for disclosing customer industry sectors in the above table.

Kiwibank Limited

Notes to the interim financial statements continued

6. Concentration of credit risk continued

		Unaudited as at 31/12/20	Unaudited as at 31/12/20	Unaudited as at 31/12/20
	On-balance
	sheet	Off-balance	Maximum
	financial	sheet	exposure to		Net credit
Dollars in millions	assets	commitments	credit risk	Collateral	exposure
Credit risk exposure
Loans and advances	23,883	3,963	27,846	(24,685)	3,161
Due from other financial institutions	193	-	193	-	193
Due from related parties	81	-	81	-	81
Derivative financial instruments	295	-	295	(25)	270
Investment securities	1,610	-	1,610	-	1,610
Cash and cash equivalents	997	-	997	-	997
Other financial assets	25	-	25	-	25
Subtotal	27,084	3,963	31,047	(24,710)	6,337
Less provision for credit impairment	(74)	(9)	(83)	-	(83)
Total	27,010	3,954	30,964	(24,710)	6,254

The table above represents the maximum net credit risk exposure of the Banking Group as at 31 December 2020. The exposures set out are based on net carrying amounts as reported in the balance sheet.

The exposure of the Banking Group derived from loans and advances to retail and corporate customers is 88% of the total maximum exposure (31 December 2019: 90%; 30 June 2020: 88%).

The preceding table provides a quantification of the value of the financial charges the Banking Group holds over a borrower’s specific asset (or assets) where the Banking Group is able to enforce the collateral in satisfying the debt in the event of the borrower failing to meet its contractual obligations. For the purposes of this disclosure, where collateral held is valued at more than the corresponding credit exposure, coverage is capped at the value of the credit exposure less amounts for which an individual impairment allowance has been recognised. The most common type of collateral is over real estate including residential, commercial, industrial and rural property, cash deposits and other security over business assets.

Restatement of disclosure of collateral and net credit exposure

The collateral that the Banking Group held against undrawn credit exposures in the prior period has been restated in the tables below to align with the calculation methodology applied in the current period. The collateral presented now includes additional collateral of $1.4 billion as at 30 June 2020 and $1.3 billion as at 31 December 2019 held against undrawn credit exposures and is calculated at a loan facility level up to a maximum of 100% of the credit exposure. Accordingly, the total net credit exposure has reduced from $7.1 billion to $5.7 billion at 30 June 2020 and $6.3 billion to $5 billion at 31 December 2019. The format of the table presenting the maximum exposure to credit risk has also been amended in the current period with the comparative periods presented in the amended format below.

		Unaudited as at 31/12/19	Unaudited as at 31/12/19
	On-balance
	sheet	Off-balance	Maximum
	financial	sheet	exposure to		Net credit
Dollars in millions	assets	commitments	credit risk	Collateral	exposure
Credit risk exposure
Loans and advances	21,564	3,564	25,128	(22,365)	2,763
Due from other financial institutions	246	-	246	-	246
Due from related parties	79	-	79	-	79
Derivative financial instruments	308	-	308	(61)	247
Investment securities	1,116	-	1,116	-	1,116
Cash and cash equivalents	561	-	561	-	561
Other financial assets	20	-	20	-	20
Subtotal	23,894	3,564	27,458	(22,426)	5,032
Less provision for credit impairment	(36)	(5)	(41)	-	(41)
Total	23,858	3,559	27,417	(22,426)	4,991

Kiwibank Limited

Notes to the interim financial statements continued

6. Concentration of credit risk continued

		Unaudited as at 30/06/20	Unaudited as at 30/06/20
	On-balance
	sheet	Off-balance	Maximum
	financial	sheet	exposure to		Net credit
Dollars in millions	assets	commitments	credit risk	Collateral	exposure
Credit risk exposure
Loans and advances	22,308	3,827	26,135	(23,263)	2,872
Due from other financial institutions	105	-	105	-	105
Due from related parties	77	-	77	-	77
Derivative financial instruments	434	-	434	(105)	329
Investment securities	1,895	-	1,895	-	1,895
Cash and cash equivalents	492	-	492	-	492
Other financial assets	27	-	27	-	27
Subtotal	25,338	3,827	29,165	(23,368)	5,797
Less provision for credit impairment	(78)	(8)	(86)	-	(86)
Total	25,260	3,819	29,079	(23,368)	5,711

7. Concentration of credit exposures to counterparties

CREDIT EXPOSURES TO INDIVIDUAL COUNTERPARTIES

Credit exposure concentrations to individual counterparties at the reporting date are disclosed on the basis of actual credit exposures. Peak end-of-day aggregate credit exposures are disclosed on the basis of actual credit exposures and have been calculated gross of set-offs using the Banking Group’s common equity tier 1 capital (“CET1 capital”) at the end of the period.

The individual counterparty exposures included in the following table exclude exposures to:

connected persons;
the central government or central bank of any country with a long-term credit rating of A- or A3 or above, or its equivalent; and
any supranational or quasi-sovereign agency with a long-term credit rating of A- or A3 or above, or its equivalent.

			Peak end-of-
			day over 6
			months
		As at	ended
		31/12/20	31/12/20
Exposures to banks
Total number of exposures to banks that are greater than 10% of CET1 capital		-	3
With a long-term credit rating of A- or A3 or above, or its equivalent		-	3
- 10% to less than 15% of CET1 capital		-	2
- 15% to less than 20% of CET1 capital		-	1
- 20% to less than 25% of CET1 capital		-	-
- 25% to less than 30% of CET1 capital		-	-
With a long-term credit rating of at least BBB- or Baa3, or its equivalent, and at most BBB+ or	Baa1, or its
equivalent		-	-
Exposures to non-banks
Total number of exposures to non-banks that are greater than 10% of CET1 capital		-	-
With a long-term credit rating of A- or A3 or above, or its equivalent		-	-
With a long-term credit rating of at least BBB- or Baa3, or its equivalent, and at most BBB+ or	Baa1, or its
equivalent		-	-

Kiwibank Limited

Notes to the interim financial statements continued

8. Due from other financial institutions

	Unaudited	Unaudited	Audited
	as at	as at	as at
Dollars in millions	31/12/20	31/12/19	30/06/20
Unsettled receivables	118	-	-
Short term advances due from other financial institutions	-	176	-
Collateral paid	75	70	105
Total amounts due from other financial institutions - current	193	246	105

As at 31 December 2020, included within the balance above, is $74.5m of collateral pledged by Kiwibank in respect of its credit support annex obligations to derivative counterparties (31 December 2019: $69.9m; 30 June 2020: $105.0m).

9. Due to other financial institutions

	Unaudited	Unaudited	Audited
	as at	as at	as at
Dollars in millions	31/12/20	31/12/19	30/06/20
Cash collateral received	25	61	105
Transactional balances with other financial institutions	7	14	10
Repurchase agreements	304	66	202
Total amounts due to other financial institutions - current	336	141	317

Funding for lending program

On 11 November 2020, the RBNZ announced a Funding for Lending Program (FLP) as one of the tools to ‘maintain low and stable inflation and support full employment’. The FLP allows the Bank to borrow directly from the RBNZ at the floating Official Cash Rate (OCR) for a term of three years and is effective from 7 December 2020 to 6 December 2022. The FLP will require approved eligible collateral to be pledged as security.

The Bank’s initial allocation, being 4% of eligible loans as at 31 October 2020, able to be drawn down between 7 December to 6 June 2022 is $924m. An additional allocation may be drawn down equal to $0.50 for every dollar of net growth in eligible loans from 1 November 2020 up to a maximum of 2% of eligible loans as at 31 October 2020. The additional allocation can be drawn down until 6 December 2022. The current OCR rate is 0.25%, and this rate will adjust in line with changes in the OCR over the lending term. As at 31 December 2020, $nil has been drawn down.

Kiwibank Limited

Notes to the interim financial statements continued

10. Deposits and other borrowings

The Kiwibank PIE Unit Trust (the “Trust”), established in May 2008, operates three funds; the PIE Term Deposit Fund, the Notice Saver and PIE Online Call Fund. Kiwibank Investment Management Limited is the Issuer and Manager (the “Manager”), Trustees Executors Limited is the Supervisor and Kiwibank is the Promoter of the Trust. Units in the Trust do not directly represent deposits or liabilities of Kiwibank, however the Trust is invested exclusively in term and call deposits with Kiwibank. At 31 December 2020, $4,462m of the Trust’s funds were invested in Kiwibank products or securities (31 December 2019: $4,557m; 30 June 2020: $4,707m).

Kiwibank guarantees the payment obligations of the Manager and any amounts owing to Unit holders under the Trust Deed in respect of their units. Kiwibank agrees to pay to Unit holders any shortfall between the amount they may receive on redeeming their units or in the winding up of the Trust and the balance of their unit accounts.

	Unaudited	Unaudited	Audited
	as at	as at	as at
Dollars in millions	31/12/20	31/12/19	30/06/20
Demand deposits non-interest bearing	4,121	2,813	3,353
Demand deposits bearing interest	5,711	3,901	4,709
Term deposits	12,059	12,503	12,535
Total deposits from customers	21,891	19,217	20,597
Current	21,512	18,694	20,197
Non-current	379	523	400

A wholesale call account balance as at 31 December 2019 of $10m and as at 30 June 2020 of $243m has been restated from Term deposits to Demand deposits bearing interest to align with the classification in the current period.

In the event of the liquidation of Kiwibank, deposit holders will rank equally with all other creditors but ahead of subordinated debt holders and shareholders. In addition, all payment obligations of Kiwibank covered by the NZP Guarantee that existed at the time the NZP Guarantee was terminated on 28 February 2017 are guaranteed under the NZP Guarantee but only to the extent of those obligations.

11. Debt securities issued

	Unaudited	Unaudited	Audited
	as at	as at	as at
Dollars in millions	31/12/20	31/12/19	30/06/20
Short-term debt
Certificates of deposit	499	531	479
Long-term debt
Medium term notes	1,409	1,677	1,460
Covered bonds	531	230	246
Fair value hedge adjustment	37	25	44
Total debt securities issued	2,476	2,463	2,229
Current	850	909	769
Non-current	1,626	1,554	1,460

The Banking Group redeemed $240m of covered bonds upon maturity during the period ended 31 December 2020 (period ended 31 December 2019: $nil; year ended 30 June 2020: $nil). The Banking Group also issued $541m of covered bonds during the period ended 31 December 2020 (period ended 31 December 2019: $nil; year ended 30 June 2020: $nil).

In the event of the liquidation of Kiwibank, holders of these debt securities, with the exception of covered bonds, will rank equally with all other creditors but ahead of subordinated debt holders and shareholders. In addition, all payment obligations of Kiwibank that existed at the time the NZP Guarantee was terminated on 28 February 2017, excluding any payment obligations, the terms of which expressly provide that they do not have the benefit of the guarantee, are guaranteed under the NZP Guarantee. Further information on the guarantee arrangements and other details relating to covered bonds are disclosed in note 19.

Kiwibank has not had any defaults of principal, interest or other breaches with respect to debt securities issued during the period (period ended 31 December 2019: no defaults; year ended 30 June 2020: no defaults).

Kiwibank Limited

Notes to the interim financial statements continued

12. Subordinated debt

	Unaudited	Unaudited	Audited
	as at	as at	as at
Dollars in millions	31/12/20	31/12/19	30/06/20
Perpetual capital bonds	150	150	150
Subordinated notes	271	-	-
Total subordinated debt	421	150	150
Current	-	-	-
Non-current	421	150	150

The Banking Group issued $275m of subordinated notes during period ended 31 December 2020 (period ended 31 December 2019: $nil; year ended 30 June 2020: $nil).

The Banking Group has not had any defaults of principal, interest or other breaches with respect to subordinated debt during the period (period ended 31 December 2019: no default; year ended 30 June 2020: no default).

As at 31 December 2020 $194m of the $275m subordinated debt qualified as Tier 2 capital for Capital Adequacy calculation purposes (31 December 2019: $nil; 30 June 2020: $nil). The subordinated debt instruments on issue do not have the benefit of the NZP Guarantee. The NZP Guarantee was terminated with an effective date of 28 February 2017.

As at 31 December 2020, $150m of subordinated debt qualified as Additional Tier 1 capital for Capital Adequacy calculation purposes (31 December 2019: $150m; 30 June 2020: $150m). The contractual terms of subordinated debt instruments on issue expressly provide that they do not have the benefit of a deed poll guarantee (the “NZP Guarantee”) provided by NZP. The NZP Guarantee was terminated with an effective date of 28 February 2017.

The subordinated debt instruments on issue are subordinate to all other general liabilities of the Banking Group and are denominated in New Zealand dollars.

The subordinated debt instruments on issue include terms and conditions as follows:

Instrument	Issue date	Amount ($m)	Coupon rate	Call date	Maturity date
Perpetual capital bonds	27 May 2015	150	3.985% p.a.¹	27 May 2025	None
Subordinated notes	11 December 2020	275	2.36% p.a.2	11 December 2025	11 December 2030

¹ Fixed interest rate was reset on 27 May 2020 from 7.25% to 3.985% and will be reset at five-yearly intervals thereafter.

2 Fixed interest rate which will be reset on 11 December 2025.

The perpetual capital bonds have no maturity date; however, Kiwibank may elect to make an early repayment on 27 May 2025 after obtaining the consent of the RBNZ. The classification of perpetual capital bonds as non-current is based on the instruments having no contractual maturity date, and the Banking Group is not contractually obliged to make any early repayment, and early repayment is subject to the RBNZ’s consent being obtained prior to repayment.

Kiwibank Limited

Notes to the interim financial statements continued

13. Concentration of funding

	Unaudited
	as at
Dollars in millions	31/12/20
Analysis by industry sector
New Zealand
Agriculture	54
Food & other manufacturing	341
Electricity, gas and water	20
Construction	337
Retail and wholesale trade	228
Transport and storage	82
Communications	64
Finance, investment and insurance	4,160
Property and business services	333
Professional, scientific and technical services	288
Government, local authorities and services	549
Education	180
Personal and other services	243
Health and community services	296
Households	16,755
Overseas
Finance, investment and insurance	1,180
Households	323
Other	8
Total funding	25,441
Lease liabilities	119
Other financial liabilities	27
Total financial liabilities	25,587

Concentrations of funding arise where the Banking Group and Kiwibank are funded by industries of a similar nature or in particular geographies. ANZSIC codes have been used as the basis for disclosing industry sectors in the analysis of financial liabilities by industry sector and geography at the reporting date.

14. Financial instruments

Fair value measurement

Assets and liabilities carried at fair value or for which fair values are disclosed have been classified into three levels according to the quality and reliability of information used to determine the fair values. The three levels of the fair value hierarchy are defined as follows:

Level 1 – Fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Fair value measurements are those where quoted market prices are not available, for example where the instrument is traded in a market that is not considered to be active or valuation techniques are used to determine fair value and where these techniques use inputs that are based significantly on observable market data.

Level 3 – Fair value measurements where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data.

Kiwibank Limited

Notes to the interim financial statements continued

14. Financial instruments continued

Valuation methodology

The fair values of assets and liabilities carried at fair value were determined by application of the following methods and assumptions.

Investment securities

Estimates of fair value for investment securities are based on quoted market prices or determined using market accepted valuation models as appropriate (including discounted cash flow models) with inputs including an interest rate yield curve developed from quoted rates and market observable credit spreads.

Other financial assets

Other financial assets that are classified at fair value through profit or loss includes secured convertible notes. The notes provide the right to convert to equity and to the underlying software assets as security in the event of default. The carrying amount of the note is supported primarily by the replacement cost of the software asset based on independent estimates.

Debt securities issued

Debt securities issued that are classified at fair value through profit or loss are short term in nature. For these liabilities fair value has been determined using a discounted cash flow model with inputs including an interest rate yield curve developed from quoted rates and market observable credit spreads.

Derivative financial instruments

Where the Banking Group’s derivative financial assets and liabilities are not traded on an exchange, they are valued using valuation techniques, including discounted cash flow and option pricing models, as appropriate. The types of derivatives classified as level 2 and the valuation techniques used include:

Interest rate swaps which are valued using discounted cash flow models; the most significant inputs into those models are interest rate yield curves which are developed from quoted rates.
Foreign exchange derivatives that do not contain options which are priced using rates available from publicly quoted sources.

		Unaudited as at 31/12/20	Unaudited as at 31/12/20
Dollars in millions	Level 1	Level 2	Level	3	Total
Financial assets
Investment securities	651	959		-	1,610
Derivative financial instrument assets	-	295		-	295
Other financial assets	-	-		2	2
Total financial assets at fair value	651	1,254		2	1,907
Financial liabilities
Derivative financial instrument liabilities	-	314		-	314
Total financial liabilities at fair value	-	314		-	314
		Unaudited as at 31/12/19
Dollars in millions	Level 1	Level 2	Level	3	Total
Financial assets
Investment securities	519	597		-	1,116
Derivative financial instrument assets	-	308		-	308
Other financial assets	-	-		-	-
Total financial assets at fair value	519	905		-	1,424
Financial liabilities
Derivative financial instrument liabilities	-	296		-	296
Total financial liabilities at fair value	-	296		-	296

Kiwibank Limited

Notes to the interim financial statements continued

14. Financial instruments continued

		Audited as at 30/06/20	Audited as at 30/06/20
Dollars in millions	Level 1	Level 2	Level	3	Total
Financial assets
Investment securities	792	1,103		-	1,895
Derivative financial instrument assets	-	434		-	434
Other financial assets	-	-		2	2
Total financial assets at fair value	792	1,537		2	2,331
Financial liabilities
Derivative financial instrument liabilities	-	400		-	400
Total financial liabilities at fair value	-	400		-	400

There have been no transfers between levels 1 and 2 during the period ended 31 December 2020 (period ended 31 December 2019: no transfers; year ended 30 June 2020: no transfers). There were also no transfers into/out of level 3 during the period ended 31 December 2020 (period ended 31 December 2019: no transfers; year ended 30 June 2020: no transfers).


Unaudited as at 31/12/20	Unaudited as at 31/12/191	Audited as at 30/06/201
Dollars in millions Carrying amount Estimated fair value Carrying amount Estimated fair value Carrying amount Estimated fair value Assets Due from related parties 81 81 79 79 77 77 Investment securities 1,610 1,610 1,116 1,116 1,895 1,895 Derivative financial instruments 295 295 308 308 434 434 Loans and advances 23,809 23,874 21,528 21,565 22,230 22,313 Liabilities Due to related parties 3 3 4 4 7 7 Derivative financial instruments 314 314 296 296 400 400 Deposits and other borrowings 21,891 21,920 19,217 19,234 20,597 20,628 Debt securities issued 2,476 2,508 2,463 2,472 2,229 2,239 Subordinated debt 421 426 150 153 150 154

The carrying values of the following financial instruments are considered a reasonable approximation of fair value because they are short-term in nature or reprice to current market rates frequently: cash and cash equivalents, due from other financial institutions, other financial assets, due to other financial institutions, and other financial liabilities. No fair value disclosures are required for lease liabilities; therefore, they are excluded from the table above.

Kiwibank Limited

Notes to the interim financial statements continued

15. Intangible assets

Unaudited as at 31/12/20 Unaudited as at 31/12/19 Audited as at 30/06/20 Internallydeveloped	Unaudited as at 31/12/20 Unaudited as at 31/12/19 Audited as at 30/06/20 Internallydeveloped
Internallydeveloped	31/12/19
Dollars in millions Computer software Computer software work in progress Total Total Total Cost at beginning of year 262 10 272 267 267 Accumulated amortisation at beginning of period (212) - (212) (193) (193)
Carrying value at beginning of period 50 10 60 74 74
Additions & Transfers 5 5 10 6 12 Amortisation (10) - (10) (11) (22) Amortisation released on disposal - - - 1 3 Written off or disposed - - - (6) (7)
Carrying value at end of period 45 15 60 64 60
Cost at end of period 267 15 282 267 272 Accumulated amortisation at end of year (222) - (222) (203) (212)
Carrying value at end of period 45 15 60 64 60

Intangible assets are assessed for impairment on at least an annual basis and whenever events or changes in circumstances indicate that the carrying amount of intangible assets may exceed their recoverable amount. Any impairment loss or write-off is recognised in the income statement as an operating expense. Write-offs and disposals of $0.2m of intangible assets were recognised in the period ended 31 December 2020 (31 December 2019: $6.5m; 30 June 2020: $7.2m).

16. Leases

Lease commitments

During the period ended 31 December 2020, the Banking Group entered into a material lease for a corporate office in Fanshawe Street, Auckland. The lease commenced on 20 October 2020 and has an initial lease term of 12 years. The lease agreement has two further options to extend of 6 years each. The Banking Group has assessed that it is not reasonably certain that these extensions will be taken up, therefore no options to extend have been factored into the lease term on initial recognition.

Information about the leases for which the Group is a lessee is presented below.

i) Right-of-use assets

Unaudited as at 31 December 2020 Unaudited as at 31 December 2019 Audited as at 30 June 2020	Unaudited as at 31 December 2020 Unaudited as at 31 December 2019 Audited as at 30 June 2020	Unaudited as at 31 December 2020 Unaudited as at 31 December 2019 Audited as at 30 June 2020
Dollars in millions Property ATM Vehicle Total	Total	Total
Balance at the start of the year 91 3 1 95 84 84 Depreciation charge for the period (7) - - (7) (7) (14) Additions/(disposals) 23 (1) 1 23 3 25
Balance at the end of the period 107 2 2 111	80	95

Kiwibank Limited

Notes to the interim financial statements continued

16. Leases continued

ii) Lease liabilities

						Unaudited as at	Audited as at
	Unaudited as at		31	December	2020	31 December 2019	30 June 2020
Dollars in millions	Property	ATM		Vehicle	Total	Total	Total
Balance at the start of the year	93	3		1	97	84	84
Additions/(disposals)	22	(1)		1	22	3	25
Accretion of interest	1	-		-	1	1	2
Payments	(7)	-		-	(7)	(7)	(14)
Lease incentive received	6	-		-	6	-	-
Balance at the end of the period	115	2		2	119	81	97

17. Dividends paid

During the period ended 31 December 2020, Kiwibank paid ordinary dividends of $nil to KGHL (period ended 31 December 2019: $11m; year ended 30 June 2020: $17m).

Restriction of payment of dividends

On 2 April 2020, the RBNZ amended the Bank’s conditions of registration to restrict the Bank from making distributions of dividends on ordinary shares in line with changes for all locally incorporated banks in New Zealand during the period of economic uncertainty caused by COVID-19. The payment of discretionary sums payable to holders of Additional Tier 1 capital instrument is excluded from this restriction.

18. Related party balances

On 13 November 2020, KGHL renewed and extended the $75.5m loan agreement with Kiwibank. The loan is available provided that the Banking Group does not exceed credit exposure to connected persons of 15% of Tier 1 capital, as required in Kiwibank’s banking conditions of registration. The loan is on no more favourable terms than corresponding exposures to non-connected persons. As at 31 December 2020, the balance owed by KGH to the Banking Group was $75.5m (31 December 2019: $75.5m; 30 June 2020: $75.5m).

	Unaudited	Unaudited	Audited
	as at	as at	as at
Dollars in millions	31/12/20	31/12/19	30/06/20
Outstanding balances
Due to related parties	3	4	7
Included in derivative financial instruments - liabilities	-	-	-
Included in deposits and other borrowings	284	14	164
Included in debt securities issued	9	9	9
Included in subordinated debt	150	150	150
Included in lease liabilities	1	1	1
Total amounts due to related parties	447	178	331
Receivables
Due from related parties	81	79	77
Included in derivative financial instruments - assets	-	-	-
Included in loans and advances	-	2	-
Included in right-of-use assets	1	2	2
Total amounts due from related parties	82	83	79

The comparative amounts as at 31 December 2019 have been updated to include the amounts due to and from related parties for lease liabilities and right-of-use assets.

The comparative amounts due to related parties as at 31 December 2019 and 30 June 2020 have been restated to include an additional $9.1m exposure to a related party for a debt security held with Kiwibank by an entity that is managed by a subsidiary of KGHL.

Kiwibank Limited

Notes to the interim financial statements continued

19. Fiduciary activities and securitisation

Provision of financial services

Financial services provided by Kiwibank to entities which are involved in trust, custodial, funds management and other fiduciary activities, are provided at fair value, except that Kiwibank does not charge Kiwibank Investment Management Limited, the manager of the Kiwibank PIE Unit Trust, any bank fees. Further, the Kiwibank PIE Unit Trust bank account used for tax payments does not earn interest.

Insurance business

The Banking Group does not conduct insurance business. However, certain insurance products which are marketed through the Banking Group’s retail network are underwritten by Kiwi Insurance Limited, a wholly owned subsidiary of KGHL, Kiwibank's immediate parent company.

Kiwi Covered Bond Trust

On 23 January 2013, the Kiwi Covered Bond Trust (the “Covered Bond Trust”) was established to hold Kiwibank housing loans and to provide guarantees to certain debt securities issued by the Banking Group. Guarantees provided by Kiwi Covered Bond Trustee Limited, as Trustee of the Covered Bond Trust, have a priority claim over the assets of the Covered Bond Trust. Since 19 February 2013, selected Kiwibank housing loans have been transferred to the Covered Bond Trust in order to facilitate the Bank’s covered bond programme.

These assets do not qualify for derecognition as the Banking Group retains a continuing involvement and retains substantially all the risks and rewards of ownership of the transferred assets. The Covered Bond Trust is consolidated within the Banking Group.

Substantially all of the assets of the Covered Bond Trust comprise housing loans originated by Kiwibank and highly rated shortdated securities, together which are security for the guarantee of issuances of covered bonds by the Banking Group, provided by Kiwi Covered Bond Trustee Limited as Trustee of the Covered Bond Trust.

The assets of the Covered Bond Trust are not available to creditors of Kiwibank, although the Banking Group (or its liquidator or statutory manager) may have a claim against the residual assets of the Covered Bond Trust (if any) after all prior ranking creditors of the Covered Bond Trust have been satisfied.

The carrying value of the Covered Bond Trust pool at 31 December 2020 is $1,000m (31 December 2019: $316m; 30 June 2020: $316m). These securities are ring fenced to ensure they are not used as collateral outside of agreements established in relation to the Covered Bond Trust.

Kiwibank RMBS Trust Series 2009-1

In May 2008 the RBNZ expanded the range of acceptable collateral that banks can pledge and borrow against as part of changes to its liquidity management programme, designed to ensure adequate liquidity for New Zealand financial institutions. The expanded collateral criteria include the use of a pool of individual residentially-secured mortgages (loans and advances) that are aggregated together to form a residential mortgage-backed security (“ RMBS ”).

The purpose of the Kiwibank RMBS Trust Series 2009-1 (the “RMBS Trust”) is to provide an in-house residential mortgagebacked securities facility to issue securities as collateral for borrowing from the Reserve Bank of New Zealand. As at 31 December 2020, included within Loans and advances to customers on the Banking Group’s consolidated balance sheet were housing loans with a carrying value of $3,500m held by the RMBS Trust (31 December 2019: $1,100m; 30 June 2020: $1,350m). These housing loans do not qualify for derecognition as the Bank retains substantially all of the risks and rewards of ownership. The RMBS Trust is consolidated within the Banking Group.

20. Segment analysis

For the purposes of determining reportable operating segments, the chief operating decision-maker has been identified as the Kiwibank Executive Committee (“EXCO”), which consists of the Chief Executive and his direct reports. The EXCO reviews the Banking Group’s internal reporting pack on a regular basis to assess performance and to allocate resources. A reportable operating segment is a distinguishable part of the Banking Group, engaged in providing products and services which are subject to risks and returns that are different from those of other segments. The business segments are defined by the customers they service and the services they provide.

The EXCO assesses the performance of the operating segments based on a measure of profit before tax. This measurement basis includes a reallocation of internal overhead expenses from non-income generating cost centres of the business. Net interest income at a segmental level includes an allocation for internal transfer pricing which eliminates to zero at a Banking Group level. Transfer pricing is allocated on a basis which reflects intersegment funding arrangements.

Kiwibank Limited

Notes to the interim financial statements continued

20. Segmental analysis

A summarised description of each business unit is shown below:

Personal – provides banking products and services to the personal banking segment.
Business – provides banking products and services to the business sector. Included within the segment are Business and Treasury services.

The basis of segmentation in the preparation of the interim financial statements are consistent with those followed in the preparation of the Banking Group’s annual financial statements for the year ended 30 June 2020.

	Unaudited 6 months ended 31/12/20	Unaudited 6 months ended 31/12/20
Dollars in millions	Personal	Business	Total
External revenue	255	32	287
Intersegment revenue	(76)	76	-
Total revenue	179	108	287
Profit before taxation	22	56	78

	Unaudited	6 months ended 31/12/19
Dollars in millions	Personal	Business	Total
External revenue	251	26	277
Intersegment revenue	(66)	66	-
Total revenue	185	92	277
Profit before taxation	28	37	65

	Auditedyear ended 30/06/20	Auditedyear ended 30/06/20
Dollars in millions	Personal	Business	Total
External revenue	501	52	553
Intersegment revenue	(138)	138	-
Total revenue	363	190	553
Profit before taxation	11	63	74

21. Risk management

There have been no material changes to the Banking Group’s policies for managing risk, or material exposures to new categories of risk since 30 June 2020.

Kiwibank Limited

Notes to the interim financial statements continued

22. Liquidity

The Banking Group holds a diversified portfolio of high-quality liquid securities to support its liquidity risk management. The size of the Banking Group’s liquidity portfolio is based on the amount required to meet its liquidity policy and includes items both classified as cash and cash equivalents and those classified as operating assets in the consolidated cash flow statement. Amounts below are presented net of any appropriate haircut where applicable.

	Unaudited
	as at
Dollars in millions	31/12/20
Cash, balances with central bank, and certain foreign currency deposits	937
Certificates of deposit	4
Government bonds and treasury bills	467
Local body stock and bonds	122
Other bonds	752
Total	2,282

The Bank also held unencumbered internal residential mortgage backed securities which would entitle the Banking Group to enter into repurchase transactions with a value of NZ$2,710m at 31 December 2020 (31 December 2019: $855m, 30 June 2020: $1,050m).

The following table summarises the cash flows of the Banking Group by remaining contractual maturities as at the reporting date. The amounts disclosed are the contractual undiscounted cash flows and include principal and future interest cash flows and therefore may not agree to the carrying values on the balance sheet. Actual cash flow may differ significantly from the contractual cash flows disclosed below as a result of future actions of the Banking Group and/or its counterparties, such as early repayments or refinancing of term loans.

The majority of the longer-term loans and advances are housing loans which are likely to be repaid earlier than their contractual terms. Deposits and other borrowings include substantial customer savings deposits and cheque accounts, which are at call. History demonstrates that such accounts provide a stable source of long-term funding for the Bank.

Kiwibank Limited

Notes to the interim financial statements continued

22. Liquidity continued

The Banking Group does not manage its liquidity risk on the basis of the information provided in the table below.

			Unaudited as at	Unaudited as at	31/12/20
						Gross
				Between		nominal
	On	Up to 3	3 to 12	1 and 5	More than	inflow/	Carrying
Dollars in millions	demand	months	months	years	5 years	outflow	amount
Non-derivative cash flows
Financial Liabilities
Due to other financial institutions	(324)	-	-	(12)	-	(336)	(336)
Due to related parties	(3)	-	-	-	-	(3)	(3)
Deposits and other borrowings	(11,028)	(4,947)	(5,494)	(487)	-	(21,956)	(21,891)
Debt securities issued	(11)	(259)	(613)	(1,523)	(175)	(2,581)	(2,476)
Other financial liabilities	(27)	-	-	-	-	(27)	(27)
Lease liabilities	(1)	(3)	(12)	(63)	(59)	(138)	(119)
Subordinated debt	-	(2)	(5)	(301)	(150)	(458)	(421)
Total	(11,394)	(5,211)	(6,124)	(2,386)	(384)	(25,499)	(25,273)
Derivative cash flows - net
Interest rate derivatives	(6)	(7)	(24)	11	(1)	(27)
Total	(6)	(7)	(24)	11	(1)	(27)
Derivative cash flows - gross
Foreign exchange derivatives
Inflow	190	90	413	895	175	1,763
Outflow	(192)	(89)	(415)	(882)	(178)	(1,756)
Total	(2)	1	(2)	13	(3)	7
Off balance sheet cash flows
Capital commitments	-	(3)	-	-	-	(3)
Undrawn credit commitments	(3,963)	-	-	-	-	(3,963)
Total	(3,963)	(3)	-	-	-	(3,966)

Kiwibank Limited

Notes to the interim financial statements continued

23. Interest repricing

			Unaudited as at 31/12/20	Unaudited as at 31/12/20	Unaudited as at 31/12/20
		Non-				Between
		interest	Up to 3	3 to 6	6 months	1 and 2	Over
Dollars in millions	Total	bearing	months	months	to 1 year	years	2 years
Financial assets
Cash and cash equivalents	997	62	935	-	-	-	-
Due from related parties	81	5	76	-	-	-	-
Due from other financial institutions	193	118	75	-	-	-	-
Investment securities	1,610	-	168	78	18	30	1,316
Derivative financial instruments	295	295	-	-	-	-	-
Loans and advances	23,809	29	7,893	3,363	8,104	2,975	1,445
Other financial assets	25	25	-	-	-	-	-
Total financial assets	27,010	534	9,147	3,441	8,122	3,005	2,761
Financial liabilities
Due to other financial institutions	(336)	(7)	(317)	-	-	-	(12)
Due to related parties	(3)	(3)	-	-	-	-	-
Deposits and other borrowings	(21,891)	(4,121)	(11,890)	(3,742)	(1,684)	(267)	(187)
Derivative financial instruments	(314)	(314)	-	-	-	-	-
Debt securities issued	(2,476)	-	(1,205)	(128)	(155)	(156)	(832)
Other financial liabilities	(27)	(27)	-	-	-	-	-
Lease liabilities	(119)	(119)	-	-	-	-	-
Subordinated debt	(421)	-	-	-	-	-	(421)
Total financial liabilities	(25,587)	(4,591)	(13,412)	(3,870)	(1,839)	(423)	(1,452)
On-balance sheet gap	1,423	(4,057)	(4,265)	(429)	6,283	2,582	1,309
Net derivative notional principals	(13)	-	5,436	(1,641)	(2,959)	(1,273)	424
Net effective interest rate gap	1,410	(4,057)	1,171	(2,070)	3,324	1,309	1,733

The table above summarises the Banking Group’s exposure to interest rate risk. It includes financial instruments at their carrying amounts, categorised by the earlier of contractual repricing or maturity dates. The fair value adjustment on the revaluation of financial instruments is categorised in the appropriate repricing category.

24. Capital expenditure commitments

Capital expenditure commitments contracted for as at 31 December 2020, but not provided for in these interim financial statements, total $3.1m (31 December 2019: $3.1m; 30 June 2020: $6.3m). The full amount is due within 12 months.

Kiwibank Limited

Notes to the interim financial statements continued

25. Contingent liabilities and credit commitments

Contingent liabilities

Commerce Commission settlement

Kiwibank uncovered issues in relation to the Credit Contracts and Consumer Finance Act and reported to the Commerce Commission in August 2019 that it failed to have in place robust home loan variation policies, procedures and systems for certain types of home loan variations in the period before April 2019. On 27 August 2020, the Commerce Commission and Kiwibank agreed that Kiwibank would pay $5.2m to customers to settle the issue. All amounts in relation to this matter were provided for in the period to 30 June 2020. As at 31 December 2020 $4.6m has been paid out to affected customers (31 December 2019: the possible impact of the Commission’s position could not be determined with any certainty therefore no provision was recognised).

Compliance, regulation and remediation

The Banking Group is subject to regulatory oversight and also continually assesses compliance with product terms and conditions and relevant legislation to identify any potential remediation claims in relation to the provision of services to customers. A contingent liability may exist, in respect of actual or potential claims, where the law is uncertain, or the potential liability cannot accurately be determined. All potential remediation claims are assessed on a case-by-case basis. Where the Banking Group has carried out an assessment of likely loss, and, where it can be reliably estimated, an appropriate provision is recognised.

Undrawn credit commitments as at the reporting date are as follows:

	Unaudited	Unaudited	Audited
	as at	as at	as at
Dollars in millions	31/12/20	31/12/19	30/06/20
Letters of credit and performance-related contingencies	49	57	47
Loan commitments	3,914	3,507	3,780
Total undrawn credit commitments	3,963	3,564	3,827

26. Events subsequent to the reporting date

There were no material events that occurred subsequent to the reporting date that require recognition or additional disclosure in these interim financial statements.

Kiwibank Limited

Capital adequacy and regulatory liquidity ratios

Unaudited

The “Banking Group” consists of Kiwibank Limited (“Kiwibank” or the “Bank”) and its subsidiaries. The Banking Group is subject to the capital adequacy requirements for registered banks as specified by the Reserve Bank of New Zealand (“RBNZ”). The RBNZ has set minimum acceptable regulatory capital requirements that are consistent with the internationally agreed framework developed by the Basel Committee on Banking Supervision.

The Bank must comply with RBNZ minimum capital adequacy ratios, calculated in accordance with the RBNZ document Capital Adequacy Framework (Standardised Approach) (BS2A), as determined in its conditions of registration.

Ordinary shares

The ordinary shares issued by the Bank, which are fully paid, are included within CET 1 capital. The material terms and conditions of the ordinary shares are:

a) each share contains a single right to vote;
b) there are no redemption, conversion or capital repayment options/facilities;
c) there is no predetermined dividend rate;
d) there is no maturity date; and
e) there are no options to be granted pursuant to any agreement.

Perpetual capital bonds

The perpetual capital bonds, issued by the Bank on 27 May 2015, which are fully paid, are included within Additional Tier 1 capital. The perpetual capital bonds are subordinate to other term subordinated debt issues and all other general liabilities of the Banking Group and are denominated in New Zealand dollars. The terms and conditions include:

a) the perpetual capital bonds constitute direct, perpetual, convertible, non-cumulative, unsecured, subordinated debt securities issued by Kiwibank;
b) interest on the perpetual capital bonds is payable quarterly at a rate of 3.985% p.a. until 27 May 2025 subject to the absolute discretion of Kiwibank;
c) unpaid interest is non-cumulative;
d) the perpetual capital bonds may be required to be converted into ordinary shares of Kiwibank Limited (or written off if conversion into ordinary shares is not possible) if certain events occur;
e) the perpetual capital bonds do not have a maturity date, however, after obtaining the consent of the RBNZ, Kiwibank may elect to make early repayment on 27 May 2025 or any reset date thereafter (reset dates occur at 5-yearly intervals, commencing on 27 May 2020) or if a tax or regulatory event has occurred (as described in the Deed Poll); and
f) the perpetual capital bonds are not guaranteed by any member of the Banking Group, Kiwibank’s parent companies (including New Zealand Post), the Crown or by any other person.

Subordinated notes

The subordinated notes, issued by the Bank on 11 December 2020, which are fully paid, are included within Tier 2 capital. The subordinated notes are subordinate to all other general liabilities of the Banking Group and are denominated in New Zealand dollars. The terms and conditions include:

a) the subordinated notes constitute direct, unsecured subordinated debt obligations of Kiwibank;
b) the subordinated notes pay interest quarterly in arrear at an initial rate of 2.36% p.a. subject to the condition that Kiwibank and the Banking Group is solvent after each payment;
c) unpaid interest accumulates;
d) the subordinated notes may be written off in certain circumstances;
e) the subordinated notes have a maturity date of 11 December 2030, however, Kiwibank may elect to make early repayment on 11 December 2025 or any quarterly interest payment date thereafter; and
f) the subordinated notes are not guaranteed by any member of the Banking Group, Kiwibank’s parent companies (including New Zealand Post), the Crown or by any other person.

Kiwibank Limited

Capital adequacy and regulatory liquidity ratios continued

Unaudited

Risk-weighted exposures

Risk-weighted exposures are derived by assigning risk-weight percentages to certain material risk categories of exposures. These exposures are measured or estimated from: selected balance sheet assets; off-balance-sheet exposures and market contracts; and business unit net income.

The Bank’s current Prudential capital requirements based on assessments of its material risk classes (commonly referred to as

“Pillar I” risk classes under Basel III) can be summarised as follows:

Credit risk – The vulnerability of the Banking Group’s lending and investment portfolios to systemic counterparty default. The risk-based capital allocation is computed following the RBNZ Standardised Approach to Credit Risk methodology (BS2A).
Market risk – The vulnerability of earnings to movements in interest rates, equity prices and currency volatility. The riskbased capital allocation is computed following the RBNZ Standardised Approach to Market Risk (BS2A).
Operational risk – The risk of loss, resulting from inadequate or failed internal processes (including legal risks), people and systems and from external events. The risk-based capital allocation is computed following the RBNZ Standardised Approach to Operational Risk methodology (BS2A).

Kiwibank’s Board is ultimately responsible for capital adequacy and approves capital plans and establishes minimum internal capital levels and limits. These are higher than the regulatory minimum.

The capital adequacy tables on the following pages summarise the composition of regulatory capital and capital adequacy ratios for the period ended 31 December 2020. Throughout the period, Kiwibank and the Banking Group complied with regulatory capital adequacy requirements.

Regulatory capital ratios

			The Banking Group	The Banking Group
	Regulatory Minima	31/12/20	31/12/19	30/06/20
Capital adequacy ratios
Common Equity Tier 1 capital ratio	4.5%	10.9%	12.0%	11.4%
Tier 1 capital ratio	6.0%	12.0%	13.2%	12.6%
Total capital ratio	8.0%	13.3%	13.2%	12.6%
Buffer ratios
Buffer ratio	2.5%	5.3%	5.2%	4.6%

		Kiwibank Limited	Kiwibank Limited
	31/12/20	31/12/19	30/06/20
Capital adequacy ratios
Common Equity Tier 1 capital ratio	10.3%	11.7%	11.1%
Tier 1 capital ratio	11.3%	12.8%	12.2%
Total capital ratio	12.5%	12.8%	12.2%

Kiwibank Limited

Capital adequacy and regulatory liquidity ratios continued

Unaudited

Regulatory capital

The following table shows the qualifying capital for the Banking Group.

				The Banking Group	The Banking Group
Dollars in millions			31/12/20	31/12/19	30/06/20
Common Equity Tier 1 capital
Issued and fully paid up share capital			737	737	737
Retained earnings (net of appropriations)			905	859	853
Accumulated other comprehensive income and		other disclosed reserves1, 2	2	(7)	(20)
Less deductions from Common Equity Tier	1	capital
Intangible assets			(60)	(64)	(60)
Cash flow hedge reserve			17	13	44
Deferred tax assets			(33)	(19)	(43)
Receivables from affiliated insurance group and other adjustments			-	(2)	(1)
Total Common Equity Tier 1 capital			1,568	1,517	1,510
Additional Tier 1 capital
Perpetual capital bonds3			150	150	150
Total Additional Tier 1 capital			150	150	150
Total Tier 1 capital			1,718	1,667	1,660
Tier 2 capital
Subordinated debt			194	-	-
Total Tier 2 capital			194	-	-
Total capital			1,912	1,667	1,660

1 Includes fair value reserve of $19m. The fair value reserve includes the cumulative net change in the fair value of investment securities until the investment is derecognised or impaired.

2 Includes cash flow hedge reserve of ($17m). The cash flow hedging reserve comprises the effective portion of the cumulative net change in the fair value of foreign exchange and interest rate derivative contracts related to hedged forecasted transactions that have not yet occurred. The cash flow hedge reserve is not eligible for inclusion in capital under BS2A 7 (3)(c).

3 Perpetual capital bonds issued by Kiwibank Limited are classified as debt of the Banking Group for financial reporting purposes.

Kiwibank Limited

Capital adequacy and regulatory liquidity ratios continued

Unaudited

On-balance sheet exposures

		31/12/20	31/12/20
	Total
	exposure			Minimum
	after credit			Pillar I
	risk		Risk weighted	capital
Dollars in millions	mitigation	Risk weight	exposure	requirement
On-balance sheet exposures
Cash and gold bullion	62	0%	-	-
Sovereigns and central banks	1,566	0%	-	-
Multilateral development banks and other international organisations	470	0%	-	-
Public sector entities	25	20%	5	-
	-	100%	-	-
Banks	41	20%	8	1
	390	50%	195	16
Corporate	140	20%	28	2
	18	50%	9	1
	1,934	100%	1,934	155
Non-property investment residential mortgage loans
<= 80% loan to value ratio ("LVR")	11,768	35%	4,119	330
80 <= 90% LVR	1,341	50%	671	54
90 <= 100% LVR	49	75%	37	3
> 100% LVR	321	100%	321	26
Non-property investment residential mortgage loans - Welcome
home loans and lenders mortgage insured loans
<= 80% LVR	306	35%	107	9
80 <= 90% LVR	291	35%	102	8
90 <= 100% LVR	55	50%	28	2
Property investment residential mortgage loans
<= 80% LVR	7,001	40%	2,800	224
80 <= 90% LVR	127	70%	89	7
90 <= 100% LVR	47	90%	42	3
> 100% LVR	86	100%	86	7
Property investment residential mortgage loans - lenders mortgage
insured loans
<= 80% LVR	25	40%	10	1
80 <= 90% LVR	1	50%	-	-
Impaired assets	-	100%	-	-
Past due residential mortgages greater than 90 days	-	35%	-	-
	6	100%	6	-
Other past due assets	3	150%	5	-
Non-risk-weighted assets	507	0%	-	-
All other equity holdings (not deducted from capital)	-	400%	1	-
Other assets	703	100%	703	56
Total on-balance sheet exposures	27,283		11,306	905

Kiwibank Limited

Capital adequacy and regulatory liquidity ratios continued

Unaudited

Off-balance sheet exposures and market related exposures

				31/12/20
		Credit	Credit			Minimum
	Total	conversion	equivalent	Average risk	Risk weighted	Pillar I capital
Dollars in millions	exposure	factor	amount	weight	exposure	requirement
Direct credit substitute	36	100%	36	98%	35	3
Performance-related contingency	12	50%	6	100%	6	1
Other commitments where original	2,999	50%	1,500	52%	778	62
maturity is greater than one year
Other commitments where original	-	20%	-	-	-	-
maturity is less than or equal to one year
Other commitments that cancel	907	0%	-	-	-	-
automatically when the creditworthiness of
the counterparty deteriorates or that can
be cancelled unconditionally at any time
without prior notice
Market related contracts:1
(a) Foreign exchange contracts	1,672	n/a	99	54%	53	4
(b) Interest rate contracts	18,845	n/a	302	47%	142	11
(c) Credit Valuation Adjustment					104	8
Total off-balance sheet exposures	24,471		1,942		1,118	89

1 The credit equivalent amount for market related contracts was calculated using the current exposure method.

Total exposure amounts in the table above are disclosed net of credit impairment provisions.

Residential mortgages by loan-to-value ratio

		31/12/20
	On-balance	Off-balance
Dollars in millions	sheet	sheet	Total
LVR 0% - 80%	19,106	1,092	20,198
LVR 80% - 90%	1,760	53	1,813
LVR 90% +	558	60	618
Total	21,424	1,205	22,629

The LVR classification above is calculated in compliance with the RBNZ Orders in Council. The off-balance sheet amounts disclosed in the table above are credit equivalent amounts disclosed net of the relevant credit conversion factor.

At 31 December 2020, of the loans with an LVR greater than 80%, $343m (31 December 2019: $394m, 30 June 2020: $360m) relates to “Welcome Home” loans, whose credit risk is mitigated by the New Zealand Crown (via underwriting by Housing New Zealand Corporation).

Kiwibank Limited

Capital adequacy and regulatory liquidity ratios continued

Unaudited

Reconciliation of residential mortgage-related amounts

Dollars in millions		31/12/20
Residential mortgages total on-balance sheet exposures		21,424
Provision for credit impairment		39
Deferred arrangement fees		81
Gross residential mortgage loans per asset quality (note	5)	21,544
Residentially secured lending included within 'Other term lending'		(960)
Gross 'term loans - housing' per loans and advances (note 4)		20,584

Credit risk mitigation

		31/12/20
	Total value of on- and off-
	balance sheet exposures	Total value of on- and off-
	covered by eligible	balance sheet exposures		Minimum
	collateral (after	covered by guarantees or	Risk weighted	Pillar I capital
Dollars in millions	haircutting)	credit derivatives	exposure	requirement
Bank	(19,757)	-	(220)	(18)
	(19,757)	-	(220)	(18)

The Banking Group uses the comprehensive method to measure the mitigating effects of collateral.

Operational risk

	31/12/20	31/12/20
		Total
	Implied risk	operational
	weighted	risk capital
Dollars in millions	exposure	requirement
Operational risk	1,528	122

Market risk


	Implied risk weighted exposure		Aggregate capital charge
		Peak		Peak
Dollars in millions	End of period	end-of-day	End of period	end-of-day
Interest rate risk	581	700	46	56
- of which relates to trading book	11	25	1	2
Foreign currency risk	7	10	1	1
Equity risk	-	-	-	-

The aggregate market risk exposure above is derived in accordance with BS2A.

The peak end-of-day aggregate capital charge is the maximum over the half year accounting period at the close of each business day for each market risk category.

Kiwibank Limited

Capital adequacy and regulatory liquidity ratios continued

Unaudited

Total capital requirements

		31/12/20
	Total	Risk weighted
	exposure	exposure or
	after credit	implied risk
	risk	weighted	Total capital
Dollars in millions	mitigation	exposure	requirement
Total credit risk plus equity	31,997	12,204	976
Operational risk	n/a	1,528	122
Market risk	n/a	588	47
Total Pillar I risk	n/a	14,320	1,145

Other material risk (Pillar II)

The Basel III capital adequacy regime intends to ensure that banks have adequate capital to support all material risk inherent in their business activities. Consequently, banks are required to maintain an ICAAP for assessing overall capital adequacy in relation to their risk profile. Kiwibank’s ICAAP methodology requires it to hold capital against the following “other material risks” (Pillar II risks), including:

Earnings risk – The current or prospective risk to earnings and growth targets arising from changes in the business environment and from adverse business decisions, improper implementation of decisions or lack of responsiveness to changes in the business environment.
Other risks – Including conduct and culture, project execution, and cyber risks.

The Bank has made an internal capital allocation of $54m (31 December 2019: $63m; 30 June 2020: $54m).

Regulatory liquidity ratios

The Bank calculates regulatory liquidity ratios in accordance with the RBNZ’s ‘Liquidity Policy’ (BS13). Ratios are calculated daily and the quarterly average of the daily ratios are disclosed below.

	Three	Three
	months	months
	ended	ended
	31/12/20	30/9/2020
Average one-week mismatch ratio	7.5%	8.3%
Average one-month mismatch ratio	8.0%	8.6%
Average core funding ratio	92.1%	91.7%

Kiwibank Limited

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Independent auditor’s review report

To the readers of Kiwibank Limited’s Disclosure Statement for the six months ended 31 December 2020 (the “Disclosure Statement”).

The Auditor-General is the auditor of Kiwibank Limited (the “Bank”) and the entities it controlled (together, the “Banking Group”) as at 31 December 2020 or from time-to-time during the six months ended on that date. The Auditor-General has appointed me, Jonathan Freeman, using the staff and resources of PricewaterhouseCoopers, to carry out a review of the interim financial statements and supplementary information included in the Disclosure Statement of the Banking Group, on his behalf.

Conclusion

We have reviewed the:

interim financial statements of the Banking Group on pages 5 to 43 which comprise the balance sheet as at 31 December 2020, the income statement, the statement of comprehensive income, the statement of changes in equity and the cash flow statement for the six months ended on that date, and the notes including a summary of significant accounting policies and other explanatory information; and
supplementary information as required by Schedules 5, 7, 9, 13, 16 and 18 of the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended) (the “Order”) for the six months ended 31 December 2020 (the “supplementary information”) and included in the balance sheet and notes 2, 5, 6, 7, 13, 19, 21, 22 and 23 of the interim financial statements and on pages 44 to 50.

Based on our review, nothing has come to our attention that causes us to believe that:

the interim financial statements (excluding the supplementary information) of the Banking Group have not been prepared, in all material respects, in accordance with International Accounting Standard 34 Interim Financial Reporting (IAS 34) and New Zealand Equivalent to International Accounting Standard 34 Interim Financial Reporting (NZ IAS 34);
the supplementary information (excluding the supplementary information relating to capital adequacy and regulatory liquidity requirements) prescribed by Schedules 5, 7, 13, 16 and 18 of the Order does not fairly state the matters to which it relates in accordance with those Schedules; and
the supplementary information relating to capital adequacy and regulatory liquidity requirements disclosed on pages 44 to 50 is not disclosed, in all material respects, in accordance with Schedule 9 of the Order.

Basis for conclusion

We conducted our review in accordance with the New Zealand Standard on Review Engagements 2410 (Revised) Review of Financial Statements Performed by the Independent Auditor of the Entity (NZ SRE 2410 (Revised)). Our responsibilities are further described in the Auditor’s responsibilities for the review of the interim financial statements and supplementary information section of our report.

We are independent of the Banking Group in accordance with the Auditor-General’s ethical requirements relating to the audit of the annual financial statements, which incorporate the relevant independence requirements issued by the New Zealand Auditing and Assurance Standards Board.

PricewaterhouseCoopers, PwC Centre, 10 Waterloo Quay, PO Box 243, Wellington 6140, New Zealand T: +64 4 462 7000, pwc.co.nz

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Our firm carries out agreed upon procedures engagements and compliance assurance engagements required to be performed by the auditor through regulation or other contractual arrangements. In addition to these engagements, partners and employees of our firm may deal with the Bank and the Banking Group on normal terms within the ordinary course of trading activities of the Bank and the Banking Group. These matters have not impaired our independence as auditor of the Banking Group.

Other than the review, these engagements and dealings in the ordinary course of trading activities of the Bank and the Banking Group, we have no relationship with, or interests in the Bank or the Banking Group.

Directors’ responsibility for the Disclosure Statement

The Directors of the Bank are responsible, on behalf of the Banking Group, for the preparation and fair presentation of the Disclosure Statement, which includes interim financial statements in accordance with IAS 34, NZ IAS 34 and Clause 25 of the Order.

In addition, the Directors are responsible, on behalf of the Bank, for the preparation and fair presentation of the supplementary information in the Disclosure Statement that complies with Schedules 3, 5, 7, 9, 13, 16 and 18 of the Order.

The Directors are also responsible for such internal control as the Directors determine is necessary to enable the preparation of the Disclosure Statement that is free from material misstatement, whether due to fraud or error.

These responsibilities are specified in the Order issued pursuant to the Reserve Bank of New Zealand Act 1989.

Auditor’s responsibility for the review of the interim financial statements and supplementary information

Our responsibility is to express the following conclusions on the interim financial statements and the supplementary information presented by the Directors based on our review:

on the interim financial statements (excluding the supplementary information):

whether, on the basis of the procedures performed by us, anything has come to our attention that would cause us to believe that the interim financial statements taken as a whole, are not prepared, in all material respects, in accordance with NZ IAS 34 and IAS 34;

on the supplementary information (excluding the supplementary information relating to capital adequacy and regulatory liquidity requirements):

whether, on the basis of the procedures performed by us, anything has come to our attention that would cause us to believe that the supplementary information does not fairly state the matters to which it relates in accordance with Schedules 5, 7, 13, 16 and 18 of the Order; and

on the supplementary information relating to capital adequacy and regulatory liquidity requirements:

whether, on the basis of the procedures performed by us, anything has come to our attention that would cause us to believe that the supplementary information is not in all material respects disclosed in accordance with Schedule 9 of the Order.

A review of the interim financial statements and supplementary information in accordance with NZ SRE 2410 (Revised) is a limited assurance engagement. We perform procedures, primarily consisting of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

PwC

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The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing and consequently does not enable us to obtain assurance that we might identify in an audit. Accordingly, we do not express an audit opinion on these interim financial statements or on the supplementary information.

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Jonathan Freeman On behalf of the Auditor-General

PricewaterhouseCoopers

24 February 2021 Wellington, New Zealand

PwC

AI assistant

Kiwibank Limited — Interim / Quarterly Report 2021

66220_rns_2021-02-25_fb050fa0-63c0-41a0-b1a9-e4ecb4886157.pdf

Disclosure Statement.

Contents

General matters

Details of incorporation

Registered office

Address for service

Other material matters

Climate change related risks

Pending proceedings or arbitration

Credit ratings

General matters continued

Conditions of registration

Changes in conditions of registration

Non-compliance with conditions of registration

Directorate

Responsible persons

Auditor

Guarantees

Covered Bond Guarantee

NZP Guarantee

Directors’ statement

Interim financial statements

Income statement

Statement of comprehensive income

Interim financial statements continued

Statement of changes in equity

Interim financial statements continued

Balance sheet

Interim financial statements continued

Cash flow statement

Notes to the interim financial statements

1. Summary of significant accounting policies

1.1 Reporting entity

1.2 Basis of preparation

Measurement base

1.3 Accounting policies

1.3.1 Interest Rate Benchmark Reform

1.3.2 Impact of COVID-19 pandemic on judgements and estimates

1.4 Basis of consolidation

Notes to the interim financial statements continued

1. Summary of significant accounting policies continued

1.5 Functional and presentation currency

1.6 Comparative amounts

2. Net gains on financial instruments

3. Net fee and other income and contracts with customers

Notes to the interim financial statements continued

3. Net fee and other income and contracts with customers continued

Reconciliation to segment reporting

Notes to the interim financial statements continued

3. Net fee and other income and contracts with customers continued

4. Loans and advances

Notes to the interim financial statements continued

4. Loans and advances continued

Business Finance Guarantee Scheme

5. Asset quality

Notes to the interim financial statements continued

5. Asset quality continued

Notes to the interim financial statements continued

5. Asset quality continued

Key changes in ECL provisions

Changes in ECL model assumptions and inputs

Notes to the interim financial statements continued

5. Asset quality continued

Notes to the interim financial statements continued

5. Asset quality continued

Changes in model overlays from 30 June 2020

Sensitivity of ECL to key judgements and assumptions

Notes to the interim financial statements continued

5. Asset quality continued

Summary of lending

Loans and advances past due but not impaired

Notes to the interim financial statements continued

5. Asset quality continued

Movement in provision for credit impairment and gross carrying amount

Notes to the interim financial statements continued

5. Asset quality continued

Notes to the interim financial statements continued

Kiwibank Limited Interim / Quarterly Report 2021