ASB bank is forecasting a leap in its funding costs over the next year as international turmoil continues to weigh on wholesale money markets.
Chief executive Barbara Chapman said the bank which today announced a net profit of $913 million, had to borrow more money on the international market in the last year increasing its funding costs by 8 basis points.
And it is forecasting those costs to rise by another 13 basis points this year which could put pressure on the bank to increase lending rates.
While the bank's loan book grew by 10 per cent to $72.1 billion in the year to June 30 its deposits have not kept pace - growing at 5 per cent in what has become a very low interest rate environment for savers.
That has forced the bank to borrow more on the international money market to fund its loan book.
Chapman said global uncertainty including prices for dairy, the US elections and fall-out from the Brexit vote were weighing on the markets.
"We are navigating through some fairly volatile situations," she said.
The last time the volatility was so high was during the global financial crisis.
Despite that she remains upbeat and said the bank's economists were still predicting growth from New Zealand's main trading partners.
Locally the bank is facing pressure from its dairy lending and has increased its overall impairment provision expenses by 46 per cent to $130 million.
Chapman said the increase had not come as a surprise and it was too soon to know if provisioning for the sector had peaked.
"We are just going to have to keep an eye on it."
Chapman said the bank had only lost $40 million on dairy sector lending in the last 10 years.
One area it is not seeing a need to increase provisioning in yet is the Auckland housing market.
"At the moment the Auckland housing market is performing extremely well," Chapman said.
Chapman said it was too soon to know if any of the latest tweaks on loan to value ratios were having an impact on home loans and the soaring property market.
Borrowers could see another boost tomorrow if the Reserve Bank cuts the official cash rate in a widely expected move.
Last time it was cut most of the banks only passed on some of the rate cut and many expect that to be the case again this time.
Chapman said she did not want to speculate on what the Reserve Bank would do and would not talk about potential home loan rates citing commercial sensitivity.
While any cuts could be good news for borrowers, savers face more pain if deposit rates are slashed further.
Chapman said when interest rates were low it tended to see a shift in more people putting their money into managed funds.
In the last year the bank saw a 15 per cent income boost from its fund management business which includes KiwiSaver.
ASB's parent company the Commonwealth Bank of Australia also reported profit growth gaining 2 per cent to A$9.227 billion.
Its operating income increased by 5 per cent to A$24.6 billion helped by strong gains in net interest income.
But the Australian bank's loan impairment expenses also rose 27 per cent due to it having to put more money aside to cover resource, commodity and dairy lending.