Lending to customers at New Zealand's banks grew by a meagre 0.7 per cent in the second half of their financial year, a report shows.

International accounting firm PricewaterhouseCoopers (PwC) releases its latest edition of the New Zealand Banking Perspectives today which shows the five largest banks - ANZ, ASB, BNZ, Kiwibank and Westpac - produced solid profits for the second half of the 2010 financial year.

The second half ended on June 30, 2010, for ASB and Kiwibank and September 30 for the rest.

PwC called the profits "unspectacular, yet respectable" given the "deep scarring" that occurred during 2009.

The report said the slow growth in the banks' lending books was being caused by lack of demand in the market as both corporates and households look to cut debt, or, in the case of large corporates, diversify their funding base.

PwC financial services partner Sam Shuttleworth said New Zealanders started reducing household debt in the second half of the year after a 0.9 per cent or $1.5 billion rise in retail lending for the first half - the lowest level in recent memory.

"Deleveraging or keeping wallets under check was becoming household vogue."

The report showed business credit for the six months grew by $500 million but this needed to be compared with the $5.7 billion reduction seen six months earlier.

Large-scale business investment on the back of robust GDP growth would be the catalyst in getting credit back to where it was before the global financial crisis, the report said.

Analysis of the five banks' combined statutory profits for the second half was $1.4 billion, slightly behind their combined profits of $1.3 billion for the previous six months.

"The majors' full-year results reinforce their financial strength and the profitability of New Zealand's banking system and confirm the ills of 2009 have well and truly been laid to rest," Shuttleworth said.

"The banks are making pleasing progress on the road to recovery. We have seen a period of solid profits but the composition is not as we had previously known it.

"But this shows strength has returned."

Massey University senior lecturer in banking Claire Matthews said even though customers got "upset" when banks posted profits, they were necessary for healthy credit markets. "People get upset if banks make money but if they don't then they collapse like we have seen and that causes a whole lot of heartache. We want to see banks making profits."

Matthews said there was still reduced confidence within the business sector and many were reluctant to take on further debt for start-ups and expansion.

"Banks are being more cautious and customers are taking far less, this is affecting the New Zealand economy. There needs to be an improvement in the economy, people need to be more confident and they will when house prices start to rise."

PwC said Kiwibank was included in the report because although much smaller than the other four, it had had a high-profile impact on the local market.

Combined figures for ANZ National, ASB, BNZ, Kiwibank and Westpac, second half of 2010 financial year.
* Profits before tax rose by $224m or 14 per cent
* Bad debt expense fell by $40m or 53 per cent
* Fragile lending growth at 0.7 per cent
* 40 per cent of mortgages now floating compared with 14 per cent in March 2007