New Zealand bank profits rose 8.6 percent in the first three months of the year as lenders honed costs while lending margins fell.
KPMG's quarterly Financial Institutions Performance Survey (FIPS) shows the New Zealand banking sector lifted net profit to $1.25 billion in the three months ended March 31 from $1.15 billion in the December quarter, when earnings dropped 8.3 percent.
Net interest margins across the sector shrank five basis points to 2.29 percent as banks fought for residential mortgage customers, forcing them to improve earnings from other forms of revenue and by clamping down on costs.
"Growth in other income, together with a reduction in operating and impaired asset expenses, were the main drivers for the industry-wide increase in NPAT (net profit after tax), which outweighed the decline in the net interest income and increase in income tax expense," KPMG said in its report.
"In an intensely competitive environment with a growing trend of new banks and other finance providers entering the market to chase the lure of growing profitability, the incumbents have shown a shift in focus towards cost cutting as a way to maintain competitive advantage."
In May, the Reserve Bank said the country's financial system was still sound, though escalating Auckland house prices were a key risk that prompted governor Graeme Wheeler to announce new loan restrictions targeting the city's property investors to stifle some demand.
KPMG said banks with high agricultural sector exposure may feel some concern over asset quality with Fonterra Cooperative Group payouts to farmers slashed for this season compared to last and with prospects for a relatively weak 2015/16 payout.
The Reserve Bank has said another year of low payouts would be a concern for the New Zealand economy, especially for some 25 percent of dairy farmers currently trading with negative cashflow.