State-owned Kiwibank has reported a flat half year profit as a net margin squeeze and heavy spending on a new computer system offset stronger lending growth.Kiwibank reported a net profit of NZ$73 million for the six months to December 31, up from NZ$72 million in the same half a year ago, after its net interest margin fell six basis points to 2.10 per cent.New Zealand's banks have all experienced net interest margin contraction over the last two years as home buyers have shifted from higher margin floating rates to lower margin discounted fixed rate mortgages. Kiwibank grew lending 8.6 per cent in the half year from a year ago, with 95 per cent of the growth coming from residential lending.Kiwibank, which is 80 per cent funded by customer deposits, grew those deposits by 8.6 per cent so its mortgage lending growth was completely funded locally. Chief executive Paul Brock told a news conference in Wellington that Kiwibank's reliance on local funding gave it an advantage over its big four Australian-owned rivals, which have about 57 per cent of their residential mortgage lending funded by non-residents.Foreign funding costs for New Zealand banks have risen by around 25 basis points or a third so far this year, as measured by credit default swap rates, although more than 85 per cent of New Zealand bank funding is for terms of one year or longer, which means the impact is not immediate.ANZ has estimated the higher funding costs were equivalent to the impact of a 25-50 basis point hike in the Official Cash Rate, causing some to question whether the Reserve Bank of New Zealand may have to cut interest rates to offset the impact.Brock said there was no need for such a move and the economy did not need a rate cut."I would have thought given the profitability of the other big banks it shouldn't be an issue for the Reserve Bank," he said.Brock said Kiwibank would complete phase two of a three-year rebuild of its core banking system in the calendar 2016 year, adding transactions and savings accounts to inwards and outward payments. Kiwibank has previously estimated the rebuild cost at over NZ$100 million.The cost of rebuilding Kiwibank's core system has restrained its profit growth over the last two years, although the bank has been able to fund its capital needs from profits and start paying dividends to its owner, state-owned New Zealand Post. It paid dividends of NZ$24 million in the first half of the year.Brock said he expected full year net profit to match or possibly exceed next year's profit of NZ$127 million and Kiwibank expected to fund its own capital needs internally and continue to pay dividends.