New Zealand bank profits fell by a whopping 28 per cent in 2020 - a drop of $1.58 billion to $4.14 billion.
The fall was the largest in the 10-year history of KPMG's Financial Institutions Performance Survey as higher impairment expenses and operating costs took their toll on the banks.
John Kensington, head of banking and finance at KPMG, said while Covid-19 appeared to have had a more immediate effect on banks' net profits than the global financial crisis, the New Zealand financial system had to date proved to be strong and the banks resilient.
"The difference between now and the GFC is that there has been enormous government support and banks are now part of the solution – working together with the Government to help customers get through the pandemic."
After the GFC bank profits dipped 1.2 per cent in 2007 and 0.1 per cent in 2008. It wasn't until 2009 that they plunged, falling 98.8 per cent.
The main driver of the profit fall in 2020 was a 275 per cent increase or $1.08 billion in impaired asset expenses, while operating expenses increased 9 per cent or $486m.
The average net interest margin fell 14 basis points from 2.10 per cent to 1.96 per cent, with net interest income seeing a slight dip of 0.46 per cent ($50.26 million) to $10.83 billion.
Conversely, interest-earning assets saw a proportionally larger increase of 6.70 per cent ($35.82 billion), with all but three of the major banks surveyed achieving an increase of interest-earning assets in 2020.
Kensington said the banking sector achieved a record low in funding costs as interest rates continue to drop.
Of the big four banks, Westpac saw the biggest drop in net profits, falling nearly 40 per cent to $681m.
Kiwibank, the fifth major bank, also saw a drop in its profits of 47 per cent to $57m.
The three Chinese banks saw the biggest growth in net profits, with Bank of China growing its net profit by 392 per cent, ICBC up 212 per cent and China Construction Bank up 72 per cent.
"While these results seem to be a bit of an anomaly compared to the general trend experienced by the banking sector this year, it needs to be remembered two of these banks are benefiting from the reversal of provisions taken in prior periods," KPMG's report noted.
Of the 20 banks the survey took in, 14 saw a drop in profits over the year.
But Kensington also noted the survey had a mix of December 2019, March, June and September 2020 years' ends, meaning even the later balance-date banks only had six months of impact from Covid-19.
"It is likely the 2021 survey may further highlight the impact of Covid-19 on the sector."
Kensington said while New Zealand had weathered the storm well so far the same could not be said for other countries.
"This poses real concern for the banking sector going forward, both through the economic effects of lockdowns imposed by our trading partners, but also what another big lockdown in New Zealand would look like were it to occur should the vaccination programme and border restrictions fail to keep the virus from re-emerging significantly within the community."