The competitive lending environment of the first half of the year intensified in the three months ended September as banks offered record-low interest rates to attract customers.
A PwC report prepared by partner Sam Shuttleworth said the low interest rate environment strained lending margins, with more customers moving to lower-margin fixed-rate mortgages.
New Zealand's five major banks - ANZ, BNZ, ASB, Kiwibank and Westpac - reported increased operating profits of $1.7 billion during the September quarter but net margins continued to decrease and lending growth was starting to slow.
The banks' net interest margin for the third quarter fell to 2.23% from 2.26% in June.
Mr Shuttleworth said the decline was partly cushioned by a fall in borrowing costs, with interest expenses falling from 3.93% to 3.71%, reflecting favourable funding conditions.
Lending growth was lower than in the previous two quarters, up 1.73% in the third quarter compared with 2.27% in June.
Total lending increased to $340.5 billion.
The slowdown was predominantly driven by slower corporate lending growth, which increased by 1.65% in the September quarter compared with 3.02% in June.
The third quarter had the lowest percentage growth in corporate lending of the past five quarters, he said.
"Interestingly, mortgage lending growth for the quarter was 1.94%, up from the previous quarter growth of 1.85%, despite market speculation the Auckland property market is cooling. This is the first quarter since March 2014 where mortgage growth in percentage terms was higher than corporate lending growth.''
Total mortgage lending at the end of September was $201.2 billion, up from $197.3 billion in June, Mr Shuttleworth said.
With the new lending restrictions in place from November 1, it would be interesting to see how the December quarter's growth panned out.
The mortgage lending growth was driven by attractive low short-term fixed interest rates.
Other retail lending remained largely static at about $13.6 billion.
The percentage of mortgages with a loan-to-value ratio (LVR) in excess of 80% continued to fall and was now at 12.9% of total mortgage lending in September compared with 12.8% in June.
The Reserve Bank implemented new LVR restrictions in November aimed at slowing down the hot Auckland property market while easing restrictions for mortgage borrowers outside Auckland, he said.
During the third quarter, the official cash rate was cut twice, from 3.25% to 2.75%.
As a result, new record-low short-term rates in the low 4% range were appearing.
Customers on floating rates were stable at 25% at the end of September.
"The stable level of customers on floating rates may be due to mortgage holders holding out for further interest rate cuts before fixing.''
PwC had observed switching during October from floating rates to short-term fixed rates, with customers with floating rates down to 24.8% and customers with fixed rates up to two years up to 64.1%, Mr Shuttleworth said.
Customers with fixed rates maturing within the next two years had increased from 61% in June to 63.4% in September.
Fixed-rate mortgages with terms above two years had continued to be less attractive to customers.
The banks' long-term interest rates were influenced by the wholesale market and with the United States Federal Reserve raising key interest rates by 0.25% on December 16, that might increase the banks' wholesale funding costs, which could ultimately lead to higher lending rates, he said.
September quarter
• Retail banks introduce record-low mortgage rates
• Mortgage lending outshines corporate lending
• Customers on floating rates remain stable at 25%
• Risk of higher lending rates as US interest rates rise
