Bank profits have rebounded from an 18 month low as they reduced their level of loan losses, and earned more from financial dealings.
KPMG's quarterly banking survey shows sector profits for the three months ended June were $1.74 billion, up 13 percent on the March quarter's $1.54b, and fractionally ahead of the same quarter a year ago.
The key driver of the profit lift was a reduction in the level of impaired assets, amounts set aside for bad debts that did not occur or have been recovered, which more than halved to $143.7m from $320.2m.
The other main contributor to the profit improvement was increased non-interest income - earnings from financial market dealings - which grew by 30 percent to $587.7m.
"It is important to note that although the impaired asset expense has decreased, it's still the second largest impaired asset expense since the start of the pandemic and has driven a 2 percent increase in provisions on lending," KPMG head of banking John Kensington said.
"Secondly, there has been an increase in non-interest income. This is a typically volatile line and has risen this quarter due to greater gains on trading and hedging products."
Kensington said he was surprised by the profit improvement, but suggested the banks were now revising the large amounts set aside during the pandemic and looking more at the current state of the economy, which might be improving.
"It's probably the removal of some historic Covid type overlays that were probably a little bit heavy handed, being replaced - with hindsight - with more realistic future economic facing ones."
Bank lending, dominated as usual by mortgages, increased less than 1 percent on the previous quarter to $513.2b, but was still down on the same quarter the year before.
The growth in banks' net interest income - the difference between borrowing and lending costs - increased 1.4 percent, with bank interest rate margins largely unchanged.
Kensington expected bank profits to fluctuate in the near to medium term and reflect the prevailing economic outlook, with more households falling behind in loan repayments, while many borrowers had yet to move to higher rates.
"With inflation and interest rates high, if we see this trend continue through the second half of the year, it is likely that we could see further increases in provisions."
ANZ remained the biggest bank with more than $1949b in assets, with Westpac second, followed by BNZ and ASB. The biggest locally owned bank, Kiwibank, remained a distant fifth.
RNZ
