Its Financial Institutions Performance Survey of banks found net profits rose nearly 48 per cent last year to hit $6.13b - the first time it had gone over the $6b mark since KPMG began monitoring the sector.
John Kensington, head of banking and finance at KPMG said while it might seem counter-intuitive for the banking sector to have performed so strongly given all the challenges being faced.
"However, we need to bear in mind the following two key factors. Firstly, the economic impact of Covid-19 has been masked by Government financial support measures, a slightly unintended consequence of monetary policy which saw significant amounts of cheap funding available for housing."
He said this gave Kiwis the confidence to continue their love affair with housing at a time when many other avenues for spending were curtailed.
"These factors saw phenomenal mortgage growth off the back of them."
The second important factor had been reversing provisions made in the prior year.
"When Covid-19 first arrived on our shores, banks were required to estimate the impact it might have on their loan losses. As we look back now with the benefit of hindsight, the negative impact of Covid-19 was greatly overestimated, and resulted in provisioning levels that have not been required (to date).
"A significant part of the banks' record performance is due to a portion of those prior year provisions being reversed in the current period."
Collectively the banks reversed impaired asset expenses of $1.69b which was a 114.49 per cent drop to a $213.43m impairment reduction.
At the same time net interest income rose by 7.07 per cent to $765.62m and non-interest income was up 5.94 per cent of $159.08m.
Banks also managed to keep a lid on their expenses with operating expenses only increased by $47.21m or 0.8 per cent.
