Bank profits have surged to a record high despite a slowing economy, rising interest rates, and strong inflation.

Collective profits for the sector were $7.18 billion for the year ended December as lending increased, bad debts remained low and margins increased.

The industry profit was 17.3 percent higher than a year ago, but the growth was smaller than the previous year when mortgage lending boomed and bad debts failed to occur during the pandemic.

Advisory firm KPMG head of banking John Kensington said the banks had made the best of the changing environment to have a "very good year".

"This on the back of controlled loan growth and margin expansion. The banks have positioned their businesses to benefit in a rising interest rate market, and their prudent lending policies have continued to allow them to report very low loan losses."

He said banks' net interest income - the difference between borrowing and lending costs - rose more than 13 percent to $13.1b, which had helped them lift their lending margins by an 13 basis points to an average 2.10 percent.

Banking lending rose 5.5 percent to $535.7b while deposits were up 4.9 percent to $417.3b.

Another factor working for the banks was the low level of bad and doubtful debts, which was $150m compared with a $210m gain in 2021 when losses that had been provided for did not eventuate.

End of the golden weather

Kensington said the slowing economy and possibly recession, as well as households trimming their budgets to cope with higher interest rates and rising mortgage payments were set to dent bank profits.

"We do expect to see flatter earnings and higher impairment growth than we've seen for some time."

He said the banks surveyed were conscious of public opinion about the size of their profits when consumers were finding it increasingly tough.

"The banking sector sees the next couple of years as an opportunity to play their role in supporting customers as they act on their social licence and build trust with the public."

Kensington said he had no opinion on whether an inquiry into the level of profits the banks were making, in some form, was justified and it would depend on what yardsticks were selected to measure banks against.

He said the major banks were extremely large corporate entities and it was no surprise that their finances should reflect that, but when measured on the basis on the return on equity or assets they lagged many other big companies.

"If you take the return on assets they're at the very low end of the scale, and if you take it on return on equity they're in the bottom quartile ... so when taken on those two measures they're not seen to be performing so well."

"Many people who claim that lower profits would be better, perhaps haven't thought through the consequences of what they are wishing for."

Kensington said the banks were complaining more loudly about the growing weight of regulations being imposed on the sector such as deposit guarantee schemes, consumer lending laws, and increased levels of capital, which some of the smaller institutions were finding increasingly onerous and a possible risk to their future.

The ANZ remained the biggest bank with more than $198b in assets, with Westpac second, followed by BNZ and ASB. The biggest locally owned bank was Kiwibank in fifth spot.

Main image (RNZ/123rf): Collective profits for the banking sector were $7.18 billion for the year ended December.