Kiwibank chief executive Steve Jurkovich says its biggest headwind over the next six months will be consumer confidence.
The state-owned bank on Tuesday declared a net profit after tax of $57 million for the year to June 30 - a fall of 47 per cent on the prior financial year after a big increase in credit impairments driven by Covid-19 and lower income from falling interest rates.
Like many businesses Kiwibank is facing uncertainty over Covid-19 and it ran four different scenarios through its loan book to work out how much to provision for potential loan losses.
The bank recognised $51m in credit impairments, up from $12m in the previous financial year, because of Covid-19.
Jurkovich said the bank's actual losses from non-performing loans were still extremely low.
"But the forecasts do look like things are tougher going forward - I think it is appropriate they rise, it is expected, you've seen that across the banks."
He said at a smaller bank like Kiwibank any rise in impairments had more of an impact on its bottom line.
"If you have got scale and you are making more money a rise in impairments doesn't really have the same financial impact.
"The smaller New Zealand banks will suffer more in terms of headline profits but the Australian-owned subsidiaries are big players and they look after a lot of customers."
Jurkovich said it was too soon to know whether the recent level 3 lockdown in Auckland and move to level 2 in the rest of the country would increase its provisions for future loan defaults again.
"My sense from our card transactions were that this lockdown in Auckland, business has bounced back faster than they did the previous lockdown, so I'm not anticipating that. But on the flipside, the second time around people might be feeling a bit more wary about it."
Jurkovich said while the liquidity and support from the Reserve Bank and the Government were really important factors the big challenge for the bank now was how confident its customers were feeling.
"Do they want to invest in a new home? Do they want to buy an investment property? Do they want to save more or start or invest in a business. All those things are really anchored in confidence, I think that is the big headwind.
"If people believe things are going to get better then we will go along okay. If people sit on their hands and don't spend it will be a bit tougher."
As of June 30 the bank had 2178 residential home loan customers with $838 million on deferral, while 2981 had $1.009 billion on interest only.
It also had 51 businesses sign up for the Government-backed Business Finance Guarantee Scheme, borrowing $8 million.
That's a small portion of its total loans and advances which sat at $22.2 billion.
Jurkovich said the bank could see a rise in home loan deferrals with the wage subsidy ending soon but many of those on a deferral or interest only were now coming off.
"We are seeing about half of the calls where people want to return to previous arrangements."
Jurkovich said home lending had proved to be very resilient in the face of Covid.
"As of end of last month it was really strong; it has proved to be really resilient - it was a bit surprising."
He said the current situation didn't change the fact that people wanted a roof over their heads.
"At these borrowing rates if you can afford a rental you might be able to afford a mortgage and we are seeing people do that. Some of the regional economies like Whanganui have grown really strongly, outside of Auckland and inside we are seeing really good growth."
He said its business customers were reporting demand from people wanting to buy cars and electronics although others in the hospitality industry or who relied on face-to-face sales were finding it difficult.
Interest rates are expected to remain low, with some commentators predicting mortgage rates will fall below 2 per cent in the future.
While that's good news for borrowers it puts the squeeze on depositors and on bank margins.
"It's a headwind that's for sure. Low interest rates are the new normal for the next few years at least. Every business has to reorientate and do what it needs to do and we have to do the same."