The BNZ has reported a $125 million drop in its full year profits on the back of a lower trading income and losses on hedging derivatives.

The National Australia Bank-owned bank made a net profit of $913m for the year to September 30.

The bank's underlying profit increased by $11m due to higher revenue but that was partly offset by higher expenses.

Its cash earnings increased $13m or 1.6 per cent to $836m, assisted by a lower charge for bad and doubtful debts reflecting the strength of economic conditions outside the dairy sector.

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BNZ chief executive Anthony Healy insisted its strategy was working.

"Our strategy is delivering for the bank, despite a challenging year in a highly competitive banking environment and with higher funding costs affecting margins."

The bank's net interest income fell by $7m or 0.4 per cent as lower margins were partly offset by higher volume growth.

The move by many home-owners to lower fixed term mortgage rates has squeezed bank margins while lending has grown with house price growth.

BNZ's net interest margin fell by 19 basis points to 2.25 per cent which the bank said reflected a competitive market environment, lower wholesale interest rates and rising funding costs.

Lending increased by $5 billion or 7.6 per cent with average housing lending up $2.1b or 6.6 per cent and business lending up $3b or 9.2 per cent.

Healy said the bank had retained its mortgage market share thanks to a focus on sustainable growth and a re-entry to the broker market.

"Housing affordability continues to be an issue, and as long as migration and supply are key factors the recent loan-to-value restrictions will only have a short term effect.

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"Like all banks, we anticipate that there will be increased pressure on lending margins in the coming months which will influence interest rates."

Charges for bad and doubtful debts decreased by $9m or 6.7 per cent.

Healy said lower specific provisions broadly reflected the strength of economic conditions but this was partly offset by higher general provisions, being mainly due to the dairy sector downturn in the first half.

"We managed our risks well and took a prudent approach to our dairy lending, making provisioning decisions early.

"The outlook could be turning for the positive, but while there is still some uncertainty we will retain our prudent approach."

The banks operating expenses increased by $8m reflecting investment in digital, small to medium enterprise business, broker and Auckland channels.

During the year the bank migrated 500,000 customers to a new online banking platform, and rationalised thousands of accounts and products.

Healy said it had seen extremely strong revenue growth of 9.1 per cent year-on-year through its SME business.

While its Auckland strategy had also delivered growth.

"We've targeted the housing and SME segments and both have seen strong volume increases.

"We continue to play an important role in helping support infrastructure growth and addressing housing supply issues."