Profits were squeezed in New Zealand's banking sector during the final quarter of last year as non-interest income decreased and impaired asset expenses rose, a survey by professional services firm KPMG has found.
The overall profit was $1.15 billion in the three months to December 31, an 8 per cent decline on the September quarter's $1.25 billion, KPMG said.
But profits in the September quarter had reached record levels and the December result reflected a "strong and sustainable level of profitability".
"The New Zealand banking sector continues to maintain a strong position and with comparably favourable economic conditions, low unemployment, and a stable interest rate environment it is in all likelihood that this position will be maintained for the near future," said KPMG's head of financial services, John Kensington.
KPMG said five of the nine survey participants reported net profit growth in the December quarter.
The overall decrease in profit was primarily the result of a 9.2 per cent and 7.9 per cent bottom-line decline at ANZ and BNZ, respectively.
Their drop in profitability was largely caused by a decrease in non-interest income resulting from unfavourable movements in hedging activities and financial instruments.
Banking minnows Heartland and the Co-Operative Bank reported the biggest profit improvements, rising 4.6 per cent and 34.3 per cent respectively, according to the report.
KPMG said Heartland's increase was achieved through strong net interest and other income, while The Co-Operative Bank had made improvements in all major income statement categories.
New Plymouth-based TSB recorded the biggest drop, reporting an $18.3 million loss after a write-off of bonds worth $53.9 million in embattled state-owned mining firm Solid Energy.
Only Westpac, the Co-Operative Bank and BNZ had an improvement in impaired asset expenses over the quarter.
The December quarter's $1.15 billion overall sector profit was a slight increase on the $1.14 billion for the same period a year earlier.
KPMG said a strong housing market had driven a 1.5 per cent increase in gross loans and advances during the quarter.
"Intense competition has had little effect on interest margins for the banking sector in this quarter," KPMG said. "All survey participants increased their interest income and interest expense over the quarter."
The report said the New Zealand economy was facing several risks including a slump in dairy prices, the "seemingly overvalued" dollar and an over-reliance on construction.
"However, high levels of construction activity and low interest rates together with a strong and growing labour market, record levels of net migration and increasing business confidence [are] all poised to give the New Zealand ... the potential for sustained growth throughout 2015."
Overall profit for NZ banking sector:
• $1.15b 3 months to Dec 31, 2014
• $1.25b 3 months to Sep 30, 2014