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BNZ Bank yesterday reported a healthy 9 per cent increase in underlying full-year profit but says it expects the next couple of months will be "challenging" and it may have to slow lending growth to maintain liquidity.

BNZ, owned by National Australia Bank which yesterday reported a 0.9 per cent fall in net profit, announced an underlying September-year net profit of $657 million, up from $605 million a year earlier.

Including one-offs, namely a $66 million gain resulting from the sale of shares in the Visa initial public offer and the revaluation of hedging instruments under International Financial Reporting Standards, BNZ's headline profit was $785 million - almost 15 per cent ahead of a year ago.

"It's been a good year for BNZ. I think we're in strong position," said chief executive Andrew Thorburn who officially replaced Cameron Clyne this month. Clyne has been appointed NAB chief executive.

The bank's total revenues rose 5.2 per cent to $1.79 billion, its lending increased 10.2 per cent to $52 billion, and customer deposits were up 7.2 per cent to $25.9 billion.

The bank held expenses down, with its cost to income ratio falling 260 basis points to 47.5 per cent. Its net interest margin was down 3 basis points at 2.45 per cent.

Tougher economic conditions saw credit quality decline, with gross impaired assets of $160 million, almost three times the $54 million level this time last year.

"Obviously we're in a cycle now when the economy is in more difficult terrain partly impacted by the international economy," said Thorburn, who said the bank accepted some increase from the "all time lows" seen until recently was inevitable.

He remained confident that BNZ's "historically conservative approach to lending" would mean that eventual write-offs on impaired assets would be low as the underlying assets were generally well secured.

Given the recent concerns about the liquidity of the global and regional banking sectors, Thorburn said BNZ was monitoring its funding position closely.

He said the bank was in a strong position in terms of liquidity and cash and still had access to a number of funding sources, including core domestic deposits, its ability to borrow through parent NAB and access to the Reserve Bank's residential mortgage-backed securities liquidity facility.

"However the commercial paper market is an important market for us and the ability to issue paper into that market has been absolutely closed because of the US and European markets. There are indications they are slowly opening up but we need to be cautious about that."

Thorburn said the wholesale deposit guarantee which is being worked on by the Reserve Bank and Treasury was "a step in the right direction".

"The issue will be that if those commercial paper markets do open up and Australian issuers have an advantage of a guarantee that we don't as a New Zealand bank, that is going to make a difference for us."

Thorburn said the BNZ was neither rationing credit nor close to having to do so but the next couple of months "will be crucial" as it waited for commercial paper markets to open further.