New Zealand's five major banks enjoyed core earnings growth of 25 per cent in the second half of their 2011 financial years compared with the previous six months, almost entirely due to the move from fixed-rate to floating-rate mortgages, international consultancy PricewaterhouseCoopers said.

Over the past few years, the trend has been for borrowers to favour floating rather than fixed rates, reflecting what has been a relatively benign period for interest rates.

In 2007, just 13 per cent of the market was in floating rates, compared with around 58 per cent now.

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PwC New Zealand financial services partner Sam Shuttleworth said bank funding costs rose in 2009, so it had taken time for the banks to price in improved margins.

"This trend has taken a while to go but now it has really kicked in, and it's coming through in these numbers," Shuttleworth said.

According to PwC's latest edition of New Zealand Banking Perspectives, the combined core earnings of ANZ National, ASB, Bank of New Zealand, Kiwibank and Westpac came to $2.8 billion in the second half, up from $2.3 billion for the first half of their 2011 financial years.

This lift was driven by increasing net interest income, growth in other operating income, and a modest reduction in operating expenses.

But it was not all plain sailing for the banks because bad debt expenses were up by $24 million over the half-year.

The banks' return on equity increased from 12.9 per cent in the first half to 15.5 per cent in the second.

Shuttleworth said in the report that the increase in the banks' earnings had come off the back of a solid performance across the most of their key profitability drivers.

The average net interest margin - a measure of the difference between the interest income generated by banks and the amount of interest paid to their lenders - was up by 4 basis points to 2.27 per cent, but still below the major Australian banks, which reported an average margin of 2.29 per cent for the same period.


He said local margins were not high by historical standards, having been well in excess of 2.3 per cent in 2007.

Shuttleworth said that with the extended "sunny spell" seen since 2010 brought on by increasing net interest margins potentially coming to an end, the banks were now looking at other levers to pull to continue their profit growth.

The previous "hot" area in the banks' results was in relation to bad debt charges.

Bad debts have increased to $379 million in the second half from $355 million in the first half, with both periods hit by the credit provisioning impact of the major Christchurch earthquake.

Looking ahead, the eurozone sovereign debt crisis could have a major impact on net interest income levels given that the cost of international wholesale funding was likely to increase unless the banks could pass on these costs to their borrowers, PwC said.

Ratings agency Moody's Investors Service has also voiced its concern about the possible impact of Europe on the local banking sector.

The agency said the banking systems in Australia, New Zealand, Korea, and Vietnam were most exposed in the event the European debt crisis continued to worsen.