KPMG's Financial Institutions Performance Survey (FIPS) suggests there is "increasing pressure" on margins as the official cash rate falls close to zero, at 0.25%.
The report says deposit funding "has limits which are required to keep the flow of funds, meaning that banks will only be able to reduce the deposit rates up to a certain point".
Speaking to TMM Online, KPMG's John Kensington said the downward pressure on interest rates would make it difficult for banks to drop mortgage rates much further.
"They borrow at a rate, and they need to make a certain margin to cover operating costs. The cost of borrowing, plus the margin, will define where the cost of lending goes. If rates have already been re-pegged since the reduction in the OCR, it's probably as far as they can go down, unless there is a further reduction in global interest rates, which causes their own borrowing costs to go down."
KPMG's FIPS report for the three months to December revealed New Zealand bank profit dropped 6.86% compared to the same period in 2018. Banks made $1.12 billion in the quarter.
"While this drop in profit was a reflection of impacts on the New Zealand economy from then-current domestic and international events, subsequently we have observed the previously unforeseen impact from Covid-19 have far more immediate and potentially prolonged and significant consequences," Kensington said.
The report covered the quarter before the Covid-19 outbreak, but Kensington believes banks will face "significant" and "wide-ranging" economic implications". He does not expect credit to dry up for mortgage borrowers, however.
"The Reserve Bank has been fairly clear. It will support the banks as much as it can in return for them supporting their customers. If banks don't support customers at this time, people won't want to be their customers. They seem to be doing the right thing."