Bank profits fell by 20 per cent or $229.6 million in the March quarter dragged down by a significant ramp up in impairment provisions as Covid-19 began to bite but the full economic hit on the sector has yet to be revealed.

KPMG's quarterly Financial Institutions Performance Survey shows net profits across New Zealand's banks fell from $1.125 billion in the December quarter to $895.6m in March.

Impaired asset expenses rose by a whopping 732 per cent - up $659.2m as banks prepared to weather the Covid storm.

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This was partly offset by higher non-interest income which rose 73 per cent, up $401.9m, driven by volatility in the market caused by the uncertainty around the pandemic.

John Kensington, KPMG head of banking and finance, said the March quarter was the first to show the impact of Covid-19 on New Zealand's banking sector but the true economic impact of the crisis would be revealed over the next three to four quarters.

"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 [RBNZ], and the sector as a whole, are all working together to guide the country through the ongoing disruption."

John Kensington, KPMG head of banking and finance. Photo / Supplied
John Kensington, KPMG head of banking and finance. Photo / Supplied

Operating expenses across the banks also rose during the quarter by 8.9 per cent or $129.2m, largely driven by BNZ's move to capitalise its software.

Net interest income was up 2.15 per cent to $2.619.7 billion but net interest margin growth was flat across most of the banks with only ASB and Kiwibank reporting a 10 basis point increase in their margins across the quarter.

NZX-listed Heartland Bank retains the highest margin at 4.5 per cent although this has been eroded over the past year with a 20 basis point drop.

TSB Bank which has competed strongly on the mortgage front in the past year with price-matching campaigns has the lowest net interest margin at 1.8 per cent followed by Westpac at 1.9 per cent.

Kensington said the visible impact of Covid-19 had only just started to be seen on the sector and there was no doubt there would be further challenges to come.

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"What no one can say with certainty is the form of the recovery - will it be a V, a W, or some other shape? So many unknown factors impact the answer here. Will there be a second wave, when will local and global borders reopen, how much is dependent on a vaccine and when can we expect one?

"What is clear is that this is uncertain, and the new normal is causing people to reassess how they act across all aspects of their lives [personal, business, social etc] and there will inevitably be a 'reset' of all the ways we interact."

Loan growth

Loan growth over the quarter was subdued at 1.27 per cent with Kiwibank, Westpac and BNZ growing the most over the three months.

Year on year Kiwibank has grown its lending book the most increasing it by 10.36 per cent to $22b, followed by Heartland at 7.03 per cent and TSB at 6.16 per cent, although they are still all dwarfed by the lending books of the big four banks.

The report noted lending was stable during the March quarter but fell off a cliff in April during the lockdown.

It had since recovered with residential lending for May back to 70 per cent of March's level.

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"We expect some of the bounce back to continue through to the end of the quarter as those who have been negatively impacted and have exhausted other credit options may look to borrow and those who are in stable financial positions may take advantage of the historically low interest rates to borrow funds for improvements or other investment opportunities," the report noted.

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