New Zealand's major banks enjoyed a combined 2 per cent increase in their core earnings in the first half of their financial year, but credit rating downgrades will put pressure on their margins, PricewaterhouseCoopers says.

Moody's review of New Zealand's big four major banks resulted in a one-notch downgrade of their long-term senior unsecured ratings to Aa3 from Aa2 in May, due in large part to their reliance on overseas funding.

"There are real concerns the impending reviews by Standard & Poor's may lead to a further credit rating downgrade as well," PwC financial services partner Sam Shuttleworth said.

Shuttleworth, in releasing the latest edition of PwC's New Zealand Banking Perspectives, said any impact that does arise from ratings downgrades would put further pressure on the banks' net interest income.

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"This leaves the New Zealand major banks in a difficult situation. With returns on equity decreasing by four percentage points in the last three years, there is likely to be increasing pressure from the shareholders to start increasing these returns," he said.

"The most obvious controllable area is costs. Yet many banks need to replace key systems in order to remain competitive in the technology-driven modern banking marketplace, while regulatory and compliance requirements continue to increase," Shuttleworth said.

The challenge for the banks would be how they "reignite" growth in their balance sheets, he said.

PwC's analysis of the five major banks - ANZ National, ASB, Bank of New Zealand, Kiwibank and Westpac - showed combined core earnings in the first half were $2.3 billion, up from $2.2 billion in the second six months of their 2010 financial years. This was driven by increasing net interest income and growth in other operating income, offset by a rise in operating expenses, PwC said. The Christchurch earthquakes halted the decline in bad debt expenses seen since 2009.

Overall, this left the banks' profit before tax largely unchanged at $1.9 billion when comparing the two halves.

Shuttleworth said there had been no major movements in the drivers of profitability since the second half of 2010.

"In fact, this reflects the lowest level of movement seen period on period in the last two years. In the face of a sluggish economy and with the impact of the Christchurch earthquake, the results for the first half of 2011, and its comparison to the previous six months is not surprising given it has been widely acknowledged by many as a difficult six months, not only for the banking sector but for New Zealand as a whole," he said.

Low interest rates have meant that bank customers are continuing to hold increasing levels of floating rate debt, relative to fixed rate debt.

This translated into net interest income for the period only increasing by $44 million (1.3 per cent) to $3.4 billion for the period, Shuttleworth said.

The kiwi's strength has provided some volatility in the foreign exchange market, which helped increase banks' customer flows and trading income.

PwC said Kiwibank, much smaller than its competitors, was included because of its high profile impact on the local market.