New Zealand banks' return on assets is being squeezed because competition in the mortgage market has become more intense than for many years.
Accounting firm KPMG's Financial Institutions Performance Survey for the December 2012 quarter shows that, at the same time, competition for deposits has eased and global market conditions have improved, reducing the banks' cost of funds.
KPMG says the competition for mortgages has been driven in part by the strong recovery in the Auckland market but also reflects the broader recovery and net migration, as well as by the rebuilding of Christchurch.
The continuing trend for mortgage customers to switch from floating rates to cheaper one and two-year fixed rates will be having a negative impact on bank profit margins, KPMG says.
The eight banks' profits rose 10.5% to $855 million from the September quarter, but that largely reflected unrealised accounting changes.
The banks' total assets collectively increased by more than $3 billion due to rising loans and advances with the biggest gainer being Commonwealth Bank of Australia which owns ASB Bank and Sovereign.