New Zealand banks had their most profitable year in more than three decades in 2017, driven mostly by a sharp fall in bad debt as the dairy sector emerged from its slump, KPMG said in its latest banking survey.

Together banks produced a 7.35 per cent, or $355.11 million, increase in net profit after tax to $5.19 billion - the highest in the survey's 31-year history - and reversing the previous year's $316.4m profit fall, KMPG said in its Financial Institutions Performance Survey review.

"The year's result highlights the relatively stable economy combined with continued strong loan growth and improved asset quality, albeit with a continued decrease in margin," KMPG said.

The increase in profitability was largely attributable to the combined impact of a $281.9 million (61.3 per cent) reduction in impaired asset expense and a $268.6 million (10 per cent) increase in non-interest income, KPMG said.

"The reduction in impaired asset expense is largely a result of an improved sector credit quality and a relatively stable economy over the past 12 months," KPMG said.

Favourable gains in banks' financial instruments further helped increase non-interest income for the majority of the survey participants, it said.

The big four - ANZ, BNZ, Commonwealth Bank of Australia (ASB) and Westpac - collectively contributed $451m of the growth in net profit.

Conversely, the fifth major bank - Kiwibank - reported a 57.2 per cent fall in net profit - which was significantly impacted by a $65m software impairment charge.

The three Chinese banks operating in New Zealand had the most impressive profit growth in percentage terms, KPMG said, with the Bank of China lifting its profit by 73.6 per cent, China Construction Bank by 138 per cent and Industrial and Commercial bank of China by 139 per cent.

KPMG partner John Kensington. (Picture / Supplied)