Last year was one of the strongest in recent times for the profitability of New Zealand's banks, according to KPMG's latest Financial Institutions Performance Survey.

The banks' combined net profits after tax increased from $2.77 billion in 2010 to $3.30b in 2011, KPMG said.

The survey, which analysed the performance of New Zealand's registered banks, showed earnings strength coming through despite the trend of customers paying off debt and the slow start to rebuilding activity in Christchurch after last year's devastating earthquakes.

John Kensington, KPMG's head of financial services, said the deleveraging trend highlighted in last year's report showed "no clear sign of abatement" and could continue into 2013 and beyond.


In part, deleveraging was a reflection of soft business confidence and fears around slowing demand from China and Europe.

He said those New Zealanders who had money were reluctant to start spending while those who did not were reluctant to borrow.

"For many, the global financial crisis was a wake-up call and people are now far more concerned about their debt levels and less likely to increase borrowing," Kensington said in a statement.

The banking sector's results for 2011 pointed to an improvement in asset quality with reductions in gross impaired assets.

"With the banking sector posting significant profits in 2011 it could be argued that we have now come out of the worst of the global financial crisis," he said.

"Given the soft business confidence it is possible some industry sectors are struggling and, should conditions not improve, a deterioration of asset quality cannot be ruled out in the future," he said.

The slow pace of rebuilding after the Christchurch earthquakes and the resulting shortage of housing led to lower levels of new mortgage lending.

"While it is certain that Christchurch will be rebuilt, there remains uncertainty much to the frustration of local residents as to the extent of the rebuild and exactly when and where building work will commence," he said.


KPMG said Christchurch will attract people from across the country once the rebuild is fully underway, which will add stimulus to the local and national economy.

All told, the rebuild of Christchurch is likely to be one of the major factors that will drive increased spending and borrowing over the next 10 to 15 years, Kensington said.

This year's survey is the 25th edition of KPMG's annual analysis the sector.