Kiwibank books a $90 million impairment on software

Kiwibank has kept the true state of its system replacement project a close secret, citing issues of commercial senstivity.

Kiwibank has booked a $90 million impairment in its software assets and flagged a major change in its SAP core banking roilout.

"Although the strategic review has not yet concluded, a potential change to how we build the core ‘back end’ IT system (CoreMod) to match the demands of the ‘future front end’ has prompted a re-assessment of the value of the work in progress since successfully migrating our batch payments to SAP," the bank said today.

Kiwibank director Kevin Molloy said the SAP CoreMod system and project was not the one to "future proof" the bank or lead it into digital transformation.

Meanwhile, Kiwibank CEO Paul Brock said the impairment was not in relation to current systems, but future ones.

"The path we've been focused on was replacing the backend systems," Brock said. However, the emphasis has now shifted to customer focused transformation and new digital channels."

The decision to impair at this time was "prudent", he said, and reflects the challenges and changing nature of banking since Kiwibank first contemplated the upgrade four years ago.

"We need to ensure that our broader IT infrastructure (not just the core system) doesn’t limit delivery of our long term strategy," Brock said.

Xero founder Rod Drury reacted on Twitter with some exasperation:

Sigh. For a $100m a local owner operator development company could have built modern core banking on PaaS and be selling it globally https://t.co/F5NACQ2blu

— Rod Drury (@roddrury) August 31, 2017

As did others:

I don't know why we keep doing this.

— Hayden Kirk (@haydenkirknz) August 31, 2017

Molloy said despite challenges from earthquake, Reserve Bank and IT systems, the bank was in a strong financial position.

Kiwibank Banking Group posted a 57 per cent drop in full year net profit while its holding company, Kiwi Group Holdings, reported a 56 percent drop,  due to the impact of impairment.

Kiwibank's net profit was $53 million in the year to June 2017 versus $124 million in 2016. Underlying profit was $122 million compared with $124 million.

The bank's holding company, Kiwi Group Holdings, which includes Kiwibank, Kiwi Wealth and Kiwi Insurance, posted a 56 percent drop in net profit to $58 million from $131 million.

Brock said meeting rapidly-changing technology and customer requirements is key. 

Fintech has become a hotbed of innovation globally, forcing Kiwibank to shift its focus away from back end change to the customer interface.Artificial intelligence in particular, was singled out as a development that is expected to alter the financial market and banking landscpe.

"In the past year over 40 per cent of sales, for example, were completed through a digital channel. More than 57 per cent of customers digitally connect with Kiwibank, collectively over 27 million times each month," Brock said. 

In July, Reseller News reported a new disclosure in a bank report revealing the core banking system replacement was falling behind schedule and costs were mounting.

The bank, which is mostly owned by NZ Post, revealed the delays in its statutory quarterly disclosure (pdf) statement to the end of March 2017.

"Kiwibank is in the process of modernising its core banking system," the report said. "This is a significant and complex change programme which is taking longer than anticipated and will involve a higher level of investment and operating risk over the next 2-3 years, both of which are being actively managed."

The previous disclosure, for the quarter to the end of December, was similarly worded but did not mention  delays to the project, dubbed CoreMod.

Brock announced two weeks ago he will be resigning after seven years leading the company. He will leave at the end of the year.

The only cost figure ever attached to the project was a minimum of $100 million but it appears the costs may be signicantly more. Kiwibank did not overtly disclose any more information about the overall costs of the CoreMod system today, but suggested it could be worked out from its next quarterly disclosure statement.

A Kiwibank spokesman said in July the bank was cautious about providing detailed information about the CoreMod project. 

"It is continuing to progress and our CEO will provide an update in general terms when we release our financial result in late August. We consider the progress of the project as commercially sensitive."

Last February, Interest.co.nz reported Kiwibank's expenses were rising as it pushed on with the upgrade. 

Kiwibank's chief executive Paul Brock said at the time the project would cost "more than" $100 million but progress was "broadly in line" with budget.

According to a briefing on Kiwibank's 2016 annual results, released in August 2016, the bank was moving on to phase two of the project, migrating savings and transaction accounts to the new SAP system. Phase one, implementing the SAP payments engine, was completed in August 2015.

Brock told Interest.co.nz phase three which would include moving across lending systems and customer records, was to follow.

At the time of the interview, the build of phase two, which included the migration of most savings and transaction accounts, was complete and in testing with data migration scheduled for "later in 2017".

Brock said phase two was "costing a little bit more" than planned and was very complex.

"I think at the end of the day it's a multi-year programme, they're pretty complex, they always seem to take longer and be more complex than what you expected," he said. "So how you establish budgets around these things is an ongoing process, but we're broadly in line with what we've expected for the first phase.

Brock said he wasn't sure how long phase three would take but estimated the end of 2017 for possible completion.

However, by February and after reporting its financial results for the half year ended December 2016, Brock was saying the cost of CoreMod would be "significantly more" than the $100 million flagged initally.

"This is a very expensive and long programme that will go over many years, and I don't intend to get into the detail of the costings around that," he told Stuff.co.nz

In May last year, Kiwibank's general manager of IT emphasised that the project was implementing SAP "out of the box", bending the bank to fit SAP and not the other way around.

SAP’s pre-configured banking software would run alongside and integrate with NZ Post’s financial system, Unit4’s Business World ERP suite. 

Phase two was scheduled for completion between May and July 2017, she said, comparing the project to "taking the engine out of the car while it is still going". However, the bank had so far avoided service interruptions.

Last year, NZ Post sold just over 37 per cent of Kiwibank to The New Zealand Superannuation Fund and the Accident Compensation Corporation. NZ Super Fund paid $263 million for a 25 per cent stake while ACC invested $231 million for a 22 per cent stake.

The $494 million deal valued Kiwibank at $1.05 billion. Around $90 million of that sale price was left with Kiwibank as additional working capital.

Kiwibank is no longer subject to the Official Information Act as a result of that transaction.