An improving economy and a massive reduction in bad loans helped Westpac New Zealand post a record half-year profit, but the bank's boss is warning that higher interest rates will cause increased "cash flow stress" for customers.

The local division of the Australasian lender reported interim cash earnings of $432 million yesterday, a 17 per cent increase on the same period a year earlier.

Charges for impaired loans plunged 94 per cent to $4 million in the six months to March 31 from $67 million a year earlier, the bank said, while mortgage delinquencies beyond 90 days had dropped to just 0.29 per cent of its loan portfolio.

Chief executive Peter Clare said the reduction in bad debt was largely the result of stronger economic growth.


The Reserve Bank estimated GDP growth reached 3.5 per cent in the year to March, up from 2.7 per cent the previous year.

"Fundamentally, as the economy is improving we're seeing a return to some prosperity in New Zealand," Clare said.

However, economic growth also means higher interest rates on debt. The Reserve Bank has lifted the official cash rate to 3 per cent and it is tipped to go higher.

"I think higher interest rates, clearly, will cause customers some more cash-flow stress," Clare said.

Westpac NZ achieved its bumper profit despite the high loan-to-value (LVR) restrictions introduced by the Reserve Bank in October, which aim to cool a surging property market in many parts of the country, particularly Auckland.

The lender's total loans increased 5.5 per cent to $63.2 billion from $59.9 billion a year earlier.

Business lending grew by 5 per cent, while mortgage lending rose 6 per cent, said the bank, which also attributed its profit growth to well-managed expenses and a strengthened balance sheet.

Westpac NZ chief financial officer Leigh Bartlett said the bank had "successfully adjusted" to the LVR restrictions.

"Our percentage of greater than 80 per cent LVR mortgages to total portfolio during the half [year] reduced from 21 per cent down to 19 per cent," said Bartlett.

Deposits grew 8 per cent in the half-year to $48.4 billion, which more than fully funded its loan growth.

While loans and deposits had grown, intense competition and borrowers' preference for fixed-rate mortgages had seen margins "compress", resulting in only 1 per cent revenue growth from a year earlier, Westpac NZ said.

The bank said its wealth business grew strongly during the half-year period, with funds under management and administration rising 19 per cent to $6.4 billion.

The New Zealand division's Australian parent, Westpac, posted first-half cash earnings of A$3.77 billion, a 7 per cent increase on the same period a year earlier.

Westpac will pay a half-year dividend of A90c a share.