Bank profitability holds firm, but margins tighten as costs and risks mount.
New Zealand's banking sector remains financially sound, according to KPMG's latest stability review, but the report warns that the conditions supporting bank profitability over recent years are shifting, with implications for how lenders price risk and compete for borrowers.
Margins narrowing as costs and competition climb
Profitability remains strong in absolute terms, with sector net profit after tax rising from $6.2 billion in 2021 to $7.7 billion in 2025. But KPMG says the earnings mix is changing: "margins are normalising" as deposit competition intensifies and borrowers grow more price-sensitive, while banks face permanently higher costs from technology, cyber security and regulatory compliance. Larger banks continue to benefit from lower cost-to-income ratios than smaller, locally owned competitors, a gap KPMG expects to persist.
That scale gap is already reshaping the competitive landscape: Heartland Group Holdings signed a conditional deal in June to acquire TSB Bank for $620 million, creating TSB Heartland Bank, a move KPMG cites as evidence of the consolidation it expects to continue over the next five years.
Mortgage lending still doing the heavy lifting
KPMG's analysis shows housing lending remains the dominant driver of credit growth, with mortgage lending rebounding in 2025 on the back of improved affordability, returning first-home buyers and more stable market conditions. Business and agricultural lending, by contrast, grew more modestly, leaving the sector's overall loan book "structurally narrow." The report notes total loan books grew from $501 billion in 2021 to $584 billion in 2025, with housing consistently outpacing the wider system.
Borrower stress has also ticked up through the tightening cycle, with arrears rising from historically low levels. However, KPMG frames this as manageable rather than alarming: "the levels of arrears do sit below the heightened periods of arrears seen during the 2009-2013 period," which covered the Global Financial Crisis and the Canterbury earthquakes. The report adds that current provisioning suggests banks increasingly view current stress levels as manageable and within expected risk appetite settings, though it flags that a further drop in house prices could push provisioning higher in coming results.
That broader picture of manageable risk is echoed by the Reserve Bank: in its May 2026 Financial Stability Report, Governor Anna Breman said the global risk environment had worsened as conflict in the Middle East threatened world energy supply, but that New Zealand's financial system remained "resilient and well positioned to support households and businesses even if economic conditions soften."
Capital strong, but resilience "must be actively earned"
Capital and liquidity buffers remain well above regulatory minimums, giving the sector a solid foundation heading into a more volatile period. Still, KPMG's overall message is one of "disciplined confidence" rather than complacency: "the sector's resilience is real, but it will need to be actively maintained."
Access and download the full KPMG report.
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