A large increase in provision for bad debt and a big increase in operating expenses has hit New Zealand banks profits.

After a run of record profits, it has dropped by about $160 million in the three months to March.

KPMG Head of Banking and Finance John Kensington says they will closely watch whether this trend continues in the next quarter.

"While the bank's core business has managed to lend more money and do it at a slightly better margin, other business income has fallen."

He says there was a slight slow down in bank loans but interest margins are up.

"Those two positives haven't been enough to account for a big increase in operating expenses and a large increase in impaired asset expenses, with a reduction in non-interest income."

The latest KPMG report on banks performance shows an 11.35 per cent decline in profits.