The advisory firm's latest Financial Institutions Performance Survey, which profiles NZ's 20 biggest banks, reveals post-tax profits fell by $1.58 billion in 2020 compared with the previous year.
Net profit after tax still came in at $4.14 billion, but earnings were hit by impaired asset expenses, which rose by 275%. Operating expenses jumped by 9%.
KPMG said Covid-19 "appears to have had a more immediate effect on banks’ net profit after tax than the likes of the global financial crisis".
The banking sector's net interest margin fell by 14 basis points, and net interest income fell by 46 basis points. Interest-earning assets saw an increase of 6.70%.
KPMG said the huge increase in impaired asset expense reflected a cautious approach from the banks, but noted the Reserve Bank's data has highlighted only a small increase in non-performing loans.
The report noted a healthy transition out of mortgage deferrals. From May to December, the total of mortgages on deferrals fell from $22 billion to less than $3 billion.
KPMG's banking head John Kensington said the banking sector remained resilient, but sounded a note of caution about the economic outlook.
"While the high house prices and low interest rates are contributing to confidence amongst homeowners, there are a lot of people for whom the ending of government assistance could have had a huge impact," he said.
