New Zealand's five major banks made a strong start to 2015, posting a combined net profit of $1.69 billion for the first three months of the year.
That's a 5.9 per cent lift on the $1.59 billion ANZ, ASB, BNZ, Westpac and Kiwibank reported for the final quarter of last year, according to advisory firm PwC.
However, PwC warns that lending margins are starting to contract as competition heats up in the banking sector.
The jump in first quarter net profit was the result of a rise in non-interest income, such as fees and commissions, of $75 million and a $33 million decrease in operating expenses, said PwC.
Those benefits had been off-set by a $3 million decrease in net interest income and a $11 million lift in bad debt expenses.
"All in all, this is another strong result reported by New Zealand's major banks behind the back-drop of escalating house prices, predominantly in the Auckland property market."
Total lending rose 1.9 per cent in the first quarter to $327.3 billion.
Mortgage lending rose 1.7 per cent to $193.7 billion.
PwC said the percentage of mortgages with loan-to-value ratios over 80 per cent had continued to fall and represented 14 per cent of total lending in the first quarter, down from 15 per cent in the previous quarter.
A decrease in net interest income - the difference between revenue generated from interest-bearing assets and the cost of servicing liabilities - had been "lost in the headlines" as banks continued to generate record profits, PwC said.
While total gross loans had grown by $6 billion during the first quarter, interest income during the same period had fallen by $40 million to $5.3 billion.
PwC said banks' lending margins were taking a hit as lenders pushed to retain customers, and attract new ones, through low interest rates.