Profits across the New Zealand banking sector fell slightly last year reversing a trend of strong profit growth seen in previous years.
Figures from KPMG's Financial Institutions Performance Survey for 2019 show bank profits fell by 1 per cent to $5.71 billion in 2019 - down from $5.77b.
That was a distinct change from 2017 and 2018 when bank profits rose by 7.35 per cent and 11.21 per cent respectively.
John Kensington, head of banking and finance at KPMG, said the lower profit was driven by lower income growth, a squeeze on bank margins and higher operating expenses as well as a significant increase in impaired asset expenses.
"There has been not as much growth on the income side."
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Operating expenses rose 6.7 per cent - an increase of $359.93 million - more than double the 3.02 per cent increase seen in 2018.
Kensington said higher expenses were all about people with the banks having to hire more regulatory staff after facing criticism from regulators over conduct and culture.
Four of the five major banks experienced an increase in impairment losses which, while it was off a low base, carried on a trend of increasing impairment losses from 2017.
Only two of the major banks - ASB and Westpac - increased their profits in 2019 while ANZ had the largest decrease in net profit with a drop of 8.11 per cent.
The margin across the sector was squeezed down to 2.10 per cent from 2.12 per cent despite cuts in the official cash rate.
And Kensington predicted banks could be in for another tough year in 2020 with the low official cash rate continuing to put pressure on margins and cost pressure continuing.
"There are still going to be regulatory costs for conduct and culture."
Banks will also have to adjust to higher Reserve Bank capital requirements which come into force from July with a seven-year adjustment period.
"I think this year you will see a lot of work done around the form [capital instruments] will take and how you pitch those instruments."
Kensington said deposit rates could also dip lower, and banks would be looking closely at which of its borrowers posed higher credit risks and those without solid security against loans.
Home loan borrowers are unlikely to see much change, although mortgage rates have already begun to tick up a little on last year, but business borrowers in riskier industries could find it difficult to re-finance - either having to pay higher interest, a reduction in how much the bank would lend or a no from the bank completely.
Kensington said those who the bank said no to could still find borrowing from a finance company an easy option but it may see higher-risk creditors squeezed out by finance companies which could push up those unable to get finance or a bank account.
"That will hit those most vulnerable," Kensington said, although he predicted the changes would likely be gradual as it was phased in over the next seven years.
"While it is not a remarkable year...it is very much a year of reset or adjustment with tremendous challenges going forward."
Kensington said this year the banks faced a number of challenges ranging from the impacts of the Australian bushfires and the coronavirus to trade wars and the local and US elections.
"The election [in New Zealand] should probably stimulate the economy because of the spending."
The Labour-led Government has already announced an $8b infrastructure spend up but Kensington said while that was welcome the biggest challenge was it just getting started.
Business confidence had picked up but still remained cautious despite record employment levels and a strong economy,
"There are a lot of things that could have an impact going forward. We don't know what is going to happen about coronavirus."
Despite that Kensington believed the banks were well prepared.
"Banks are used to saying why aren't you paying me? Oh it's because you are exporting to China, we will put you on interest only."
All the major banks had an increase in interest earning assets in 2019 with Kiwibank's assets jumping the most with an increase of 10 per cent to $22.08b.
Total assets for the banking sector were up 7.67 per cent to $570.4b and came on top of a 5 per cent rise in 2018.
The KPMG report said this reflected a strong economy which had enabled the banking industry to continue to grow lending, with lower lending rates allowing borrowers to service more debt.
While the major five banks account for 90 per cent of assets in the sector China Construction Bank and Bank of China saw the largest percentage increases in total assets, up 41 per cent and 37 per cent respectively.
Gross loans and advances grew by 5.37 per cent across the sector. Of the five major banks Kiwibank had the strongest rate of growth at 11.68 per cent, up $2.14b, while ANZ had the lowest growth of the five major up 3.54 per cent.
ANZ also lost market share dropping 51 basis points to 28.92 per cent, although it remains the biggest player. Some of that market share was picked up by Kiwibank which increased its share by 25 basis points to 4.43 per cent.
Four out of the five major banks also reduced staff numbers in 2019 with ASB the only one to increase staff. ANZ reduced staff numbers by 260 to 7114 while BNZ reduced its headcount by 200 to 4503.
Kiwibank dropped 42 roles to 1449 and Westpac shed 19 workers to 4105. ASB added 268 staff to grow to 5229.
ANZ and Westpac had the highest personnel cost at an average of $127k per employee.
Branch numbers also fell from 1024 to 980 while ATM numbers dropped from 2535 to 2513.