Competition continued to be intense with home-loan giveaways — KPMG survey.

Profits across the New Zealand banking sector were strong over the June quarter, driven in part by lending asset growth and improved interest margins, KPMG said in its latest quarterly performance survey for the sector.

It was also the strongest quarter for non-interest income seen in years, the international consultancy said. Loan impairment represented 8 basis points of gross loans and advances - well below the long run average of 19 basis points, it said.

Overall, net profit after tax for the sector was $1.125 billion - a $25 million reduction from the March quarter.

However if a one-off $91 million insurance settlement that ANZ Bank recorded in the March quarter was removed, the "normalised" result would have been a 6.2 per cent increase in profits over the quarter.

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Total assets for the June quarter climbed to another all-time high of $390 billion, up 0.83 per cent from March 2014 and a yearly increase of 2.83 per cent.

Competition has continued to be intense during the quarter, with more varied and different giveaways for residential mortgage borrowers, KPMG said.

Some easing on the deposit side of the balance sheet had meant the money available to fund mortgage lending was more readily available and cheaper, it said.

KPMG said asset quality deteriorated over the quarter, "but this moves the level of impaired loans from minuscule to tiny".

KPMG said overall credit quality continued to be very strong.

See the KPMG research here:

The Reserve Bank this month put the official cash rate on hold at 3.5 per cent and signalled a slowdown in the rate of future rises, allowing mortgage fixing to come back into vogue.

House sale volumes were down, with the shift to fixed mortgage rates more than double that of residential floating mortgages during the June 2014 quarter, KPMG said.

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The flow rate of loans into fixed rate mortgages is roughly 70 per cent of all lending.

"Against this slowing in volumes, we still continue to see reporting of record and sustained house price increases in some markets - most notably Auckland - which points to the ongoing supply/demand issue in the market," KPMG's head of financial services John Kensington said.

"This quarter shows that the banks do continue to face and manage well the many economic challenges ahead," he said.

"The rural sector is coming to terms with the fact that the $8.65/kg milk pay-out experienced in 2013/14 is going to feel a bit like the day after a big night out ... a bit groggy, a bit headachy and wondering how you spent so much the night before," he said.

KPMG said the New Zealand economy had lost some momentum since the start of the year but remained healthy, with GDP growth at 0.7 per cent for the quarter and 3.5 per cent for the year.

Quarterly analysis of NZ banking sector

• Net interest income up $56.9 million (2.81 per cent)

• Non-interest income up $23.5 million (3.46 per cent

• Operating expenses up by $49.6 million (or 4.5 per cent)

• Impaired assets up by $55.6 million (521.65 per cent)

• Tax expense up by $0.21 million (0.05 per cent).