New Zealand's banking sector continues to rack up record profits as it counters a slowdown in lending with improved margins, and lower expenses, but it could soon be the end of the golden weather.

Business advisory company KPMG's latest review of the sector showed the total profit of the banks for the three months ended March rose 8.1 per cent on the previous quarter to a record $1.74 billion, and 6.2 per cent higher than the same quarter a year ago.

Much of the increase came from a 2.1 per cent rise to $2.99 billion in net interest income – the difference between banks' interest earning assets and their interest bearing liabilities – as well tightly controlled expenses.

KPMG head of banking John Kensington said the higher profits seemed to suggest banks have been immune to the rising inflation, interest rates, and various Covid-19 or war related disruptions, but the effect of stronger economic headwinds would likely start to show later in the year.

"How deeply the impact is felt is yet to be seen – the sector has been planning for these, and we've only just seen the first signs of an impact in the form of provisioning levels increasing," he said.

The past year has seen bank profits boosted by the reversal of money put aside for bad loans that did not eventuate, but the latest report showed $53 million extra put aside compared with a gain of $35 million the previous quarter.

Kensington said it usually took a couple of years for the impacts of major economic shocks to be fully felt in New Zealand and reflected in bank performance.

"In the next year or so we would expect to experience the full effect of the pandemic and the resulting inflationary pressures, increased interest rates, supply chain and labour shortage issues."