The profitability of the country's banks has taken a significant hit from the Covid-19 pandemic as the amount put aside for bad debts has mushroomed, according to a new report.
Business advisory firm KPMG's latest quarterly Financial Institutions Performance Survey for the first three months of the year showed bank profits have fallen 20 percent to $896 million from the previous quarter.
KPMG's head of banking and finance, John Kensington, said the banks were in strong financial shape going into the crisis and the impact on their finances was to be expected, although he also expected there will be worse to come.
"Impairments have started to come through but the situation is currently better than expected and probably does not reflect anywhere near the full impact."
Bank lending, interest rate margins, and income were generally steady, although operating expenses rose.
Kensington said the banks were in a pivotal role in sustaining households and businesses through the Covid-19 pandemic and had the chance to shine during the crisis.
"Banks need to be seen to do the right thing by their customers and the economy as a whole while maintaining their own business viability."
He said banks were "incredibly nervous" as they trod a fine line between maintaining lending to consumers and businesses, and being responsible lenders, and in some circumstances that would mean turning people down.
"There will have been people who were in trouble before the pandemic and it's not unreasonable that do not continue to lend or increase the lending to them, and the banks are still required to lend responsibly, and that's a quandary for them... I think they're still going through something of a learning curve."
Kensington said the pandemic would show whether the banks need to be even stronger, with increased capital and reserves.
The Reserve Bank early in the pandemic delayed the implementation of new capital rules by a year.
Kensington said if the banks came through the pandemic in strong shape there might be questions as to whether the new capital adequacy rules were needed, but he expected the RBNZ would merely push out the timetable for their introduction.