The four big Australian-owned banks - ANZ National, ASB, Bank of New Zealand and Westpac - are creaming it in New Zealand.

Their profit performance has been so outstanding that the NZX would be one of the world's best-performing sharemarkets if they were listed as stand-alone companies in New Zealand.

Unfortunately that is not the situation and all we can do is watch with envy as the country's four largest banks comprehensively outperform our largest domestic listed groups and deliver huge returns to their overseas shareholders.

The four banks reported total net earnings of $1.39 billion for the first half of the 2011 financial year, a 48 per cent increase over the $940 million for the first half of the 2010 year.

These are the figures reported by the Australian parent; they can differ slightly from the figures released in New Zealand.

The four largest NZX listed companies - Fletcher Building, Telecom, Contact Energy and Auckland International Airport - reported net earnings of $477 million for the first half of their 2011 year, an 11.3 per cent decline on the $538 million of the first half of the 2010 year.

The large banks are far more profitable than the top four NZX companies - they reported total net earnings of $2.64 billion in the past twelve months, and the largest domestic listed companies had net earnings of only $882 million in the same time.

The banks' performances have been impressive, particularly in light of the depressed economy and the fact annual bank lending growth has been below 2 per cent for most of the past year.

ANZ National reported underlying profit of $605 million for the six months to March 31, a 61.8 per cent increase over the $374 million it made in the first half of the previous year.

The main contributor to the improvement was a substantial reduction in bad loan provisions from $330 million to $85 million.

The bank warned that the February earthquake in Christchurch was likely to affect provisions over the short to medium term.

It had this to say about the domestic economy: "While the devastating [earthquake] has set back New Zealand's economic recovery, we still expect strong growth to emerge over the second half of the year, boosted by the Rugby World Cup 2011 and earthquake reconstruction work."

ANZ National's net interest margin increased from 2.2 per cent in the first six months of the 2010 financial year to 2.4 per cent in the latest six-month period.

The Commonwealth Bank of Australia reported that its ASB Bank had net earnings of $293 million for the six months to December, a 57.5 per cent increase over the same period a year earlier. These figures are slightly higher than the New Zealand reported earnings because CBA includes a small contribution from the Pacific Islands.

ASB's improved result also came from a reduction in loan impairment expenses, from $127 million in the six months to December 2009 to $36 million for the latest period.

The bank's net interest margin rose from 1.6 per cent to 2.0 per cent even though rural and business lending was weak.

The Bank of New Zealand had net earnings of $283 million for the six months to March, an 11 per cent increase over the $255 million achieved in the same six months of the previous year.

The result was satisfactory because bad debt provisions were $95 million compared with $88 million in the previous period.

BNZ has raised its share of the retail deposit market from 17.5 per cent to 18.1 per cent and is placing a strong emphasis on cost control.

A company statement said lending growth was modest because the housing market was subdued and many businesses remained focused on paying off debt rather than expansion.

It went on to say "we are however optimistic about the longer term economic outlook with favourable stimulus provided by the Rugby World Cup, the Christchurch rebuild and favourable commodity prices".

BNZ's interest rate margin increased from 2.1 per cent to 2.2 per cent over the past year.

Westpac's net earnings for the six months to March were up 68 per cent to $210 million against $125 million in the previous financial year.

The improved result came from a combination of cost controls and a 9 per cent growth in net operating income. Bad debt provisions were down 34.1 per cent, from $208 million to $137 million.

The bank said it was seeing signs of economic recovery in New Zealand, although activity was expected to be subdued until late this year.

"Although global uncertainty remains, the growth trajectory of our major trading partners in Asia and Australia appears to be sustainable," it said.

"Consumer spending is rising and nationwide house sales are on the up despite the earthquake disruption."

Westpac's net interest margin increased to 2.3 per cent from 2.1 per cent in the same time a year earlier.

We moan and groan about the dominant position of the four Australian banks, their conservative lending policies - particularly as far as business is concerned - and the huge dividends they transfer across the Tasman every year. But they have served us well during the global financial crisis.

The Australian banks didn't develop large investment banking operations in the 1990s and early 2000s, nor did they have a large involvement in derivatives or other speculative financial products.

As a result, they have weathered the global economic downturn remarkably well.

Bloomberg sharemarket indices show the US bank index has plunged 61.1 per cent since the beginning of the global financial crisis and the European bank index is down 56.9 per cent, but the Australian Bank Index has declined 16.7 per cent.

The Reserve Bank of New Zealand's latest Financial Stability Report, issued this week, has reiterated that our banks continue to perform well.

"Banks have made significant progress in reducing some of the vulnerabilities that were highlighted during the crisis, in particular reducing reliance on short-term offshore funding and increasing liquid assets," the report said.

"Credit criteria, which were tightened during the past few years, appear to have eased recently, in some areas at least. Net interest margins have risen but are still below pre-crisis levels, suggesting that banks are competing for good business."

Our banks are cautious - 56.8 per cent of their lending goes to residential mortgages - but this conservative approach has stood the economy well during the financial crisis.

New Zealand's problem is not the banks, but our inability to develop other financial institutions that provide funds for start-up companies and high-risk entities that want to expand.

The NZX is tiny and the finance company meltdown, which was caused by reckless lending to property developers, has made it more and more difficult for non-bank operators. Kiwibank is not a solution because it is still small, its recent profit performance has been disappointing and it has a higher percentage of residential property lending than its competitors.

KiwiSaver offers the best prospect of a non-bank funding source for businesses, but our political leaders don't seem to realise this as they continually tinker with the scheme.

Unfortunately this will reduce its attractiveness, growth potential and its ability to play a leading role in the resurgence of the economy.

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Brian Gaynor is an executive director of Milford Asset Management.bgaynor@milfordasset.com