Bank profits drop 20%

Net profit across the sector fell by 20.4% in the March quarter, compared with the three months to December. The period included the first week of New Zealand's nationwide lockdown. 

The banking sector recorded a net profit of $895.6 million in the first three months of the year, but was hit with a "considerable" $659.2 million increase in impaired assets, KPMG said.

While profits fell significantly, the advisory firm warned the worst was yet to come. 

"The visible impact of the Covid-19 pandemic has only just started to be seen on the sector result and there is no doubt there will be further challenges to come," said KPMG's John Kensington, author of the report. 

The Financial Institutions Performance Survey said New Zealand's banks were in good shape to ride out the downturn, compared with the GFC.

"New Zealand is fortunate for two reasons: that comparatively, the New Zealand banking sector was in a strong position going into this crisis; and that the Government, Treasury, Reserve Bank of New Zealand, and the sector as a whole, are all working together to guide the country through the ongoing disruption," Kensington added. 

The advisory said mortgage lending was not impacted in the first quarter of 2020, as lockdown only affected the final week of March.

KPMG said the end of LVR restrictions would likely boost the lending market, but noted reports "that some are reluctant to lend".

The advisory firm said low interest rates and "mortgage wars" would continue to put pressure on banks' balance sheets in the months to come.

"While low interest rates can make borrowing an attractive option for customers, it compresses the banks’ operating margins which will result in them needing to review their costs and profitability models."