How much banks have to pay for off-shore funding will be the main determinant of whether home loan rates continue to rise this year, says ASB bank boss Barbara Chapman.
The bank today announced a first half net profit of $525 million for the six months to December 31, up 11 per cent on the same prior period.
Chapman said demand from borrowers continued to be strong but funding costs would remain a headwind this year.
ASB, and a number of rival banks, have already increased home loan rates this year.
Asked whether more rises were likely Chapman said: "I think that will depend on off-shore funding markets."
Chapman said its economists were not expecting to see any change to the official cash rate until 2018 so it was more a story of what happens outside of New Zealand that would impact rates.
Globally volatility and uncertainty were just a fundamental fact she said.
Despite that challenge Chapman said borrowing demand remained strong and deposits had also picked up.
"The demand for borrowing is still strong. The deposit market has recovered a little bit - but I am reluctant to call it a trend," she said.
Since the start of the year the bank had seen a slow down in the number of house sales in Auckland which was likely to be driven by loan-to-value restrictions, particularly on investors, starting to bite.
But she said overall across New Zealand property prices were still up and she said the fundamentals in Auckland were still strong.
In the six months to December 31 the bank grew its loan book by 11 per cent to $76 billion with its home loan business up 10 per cent and commercial and rural lending up 13 per cent.
Its deposits grew 5 per cent.
But the bank also saw an increase in its loan impairment expenses and a squeeze on its margins.
ASB's loan impairment expense grew 20 per cent ($8m) from the prior comparative period following increased provisioning, reflecting strong lending growth and lower home loan provision releases.
Chapman said the impairment increase was in line with the growth of its loan book.
"We are not seeing any strain."
Meanwhile its cash net interest margin decreased 17 basis points to 2.21 per cent reflecting higher costs associated with wholesale funding and increased costs relating to customers breaking fixed rate loans.
"As customers take advantage of the current low interest rate environment we are seeing a continued preference for lower margin fixed rate loans," Chapman said.
"At the same time, banks now are facing a changing dynamic around the increasing volume and cost of international funding needed to meet local lending requirements.
"With levels of local deposits failing to keep pace with the amount of lending banks are doing, the increased use of offshore funding has increased funding costs, reducing our net interest margin."
ASB's parent company Commonwealth Bank of Australia made a net profit after tax of A$4,895m for the six months to December 31, up 6 per cent on the same prior period.