Higher funding costs and a potential financial shock in Europe are the biggest challenges facing New Zealand's main trading banks, according to a report by accountancy firm PricewaterhouseCoopers.
The New Zealand Banking Perspectives analysis found New Zealand's five major banks - ANZ National, ASB, BNZ, Westpac and Kiwibank - have survived troubled times and are on a slow road to recovery.
"They have got themselves in a good position," said PWC financial services partner Sam Shuttleworth."
But there were still potholes in the road ahead, he warned.
As banks were reliant on wholesale funding, if anything happened to those markets it could cause costs to rise.
The biggest risk was the Northern Hemisphere.
Although banks there had passed stress tests, there was still a chance a shock event could occur.
"If cracks appear, funding costs could become higher."
Any major events could also cause people to question whether they should put money into New Zealand, he said. "But the Reserve Bank is pretty quick to act."
Shuttleworth said the bank could remedy the situation by bringing back the wholesale funding guarantee, although it was difficult to determine the likelihood of that happening.
However, at this stage, New Zealand banks' finances were sound and stable.
"In the event that liquidity is driven up again there are some good levers to make sure the banking system factors that in."
The recession meant that banks had already faced one of the toughest periods.
But despite economic factors improving, funding costs were showing no signs of easing.
"And because of that there will be upwards pressure on what the banks will be prepared to lend out at."
Corporate provisioning had fallen off and household defaults had also eased, although a fall in household defaults was lagging behind the fall in corporate write-downs.
In the corporate sector bad debt expenses were down by $491 million to $315 million but bad debt write-offs to the household sector were only down $7 million to $453 million when compared with the previous six months.
Shuttleworth said it would take a major macro event for household defaults to rise. "There are thousands of loans under $1 million. It would take a lot to default to have an impact."
Corporate loan write-offs could be much bigger, though.
An increase in those appeared to be unlikely, based on the expectation that New Zealand was now through the worst of the storm.
"However, if commodity prices drop and the Fonterra payout falls, we would need to review everything again."
Shuttleworth said banks could not control potential shocks. All they could do was focus on diversifying their funding streams and becoming less reliant on overseas borrowing while trying to stimulate lending.
"There needs to be a change in demand but also a realisation that the pre-GFC days when credit was cheap, those days are not here in front of us."
The risks have increased so borrowers should expect to pay more.
"Risk has been re-priced."
Shuttleworth said he could not see the demand in lending changing rapidly.
Combined results for ANZ National, ASB, BNZ, Kiwibank and Westpac:
* First half of financial year- $1.3 billion profit
* Previous six months - $1.4 billion loss