Westpac New Zealand expects the pressure on its profit margins from customers moving to fixed-rate mortgages to continue in the near term but also expects to benefit from the improving economy.
Its first-half cash earnings rose 17 percent due to cost control and lower charges against profit for bad debts.
Chief executive Peter Clare said the bank was suffering compressed margin from customers moving from fixed rates to variable rates.
The bank didn't provide its statutory, or official, earnings results. There can be material differences between cash and statutory earnings - ANZ Bank's results last week showed a 34 million dollar difference between the two measures.
Westpac's cash earnings for the six months ended March rose to $432 million.
Although loans grew 6 percent and its deposits rose 8 percent, Westpac said intense competition and a customer preference for fixed-rate mortgages has seen its profit margins compress.
Net interest margin fell to 2.28 percent in the latest six months from 2.34 percent in the same six months a year earlier.
Charges against profit for bad debts fell to $4 million compared with $67 million in the year-earlier six months.
Westpac said its mortgage lending to people with small deposits accounted for 7 percent of new flows in the latest six months.
While that's below the 10 percent maximum allowed by the Reserve Bank under its new lending restrictions, it's above the 5.6 percent level for all banks in the six months.
Westpac said overall its mortgage book grew by 3 percent - on the numbers the bank has released, its mortgage book grew by $2.2 billion to $38.6 billion.
Radio New Zealand asked Mr Clare whether he expected the shift to fixed-rate mortgages to continue as interest rates rose and whether profit margins would be squeezed further. "It is where we are in the cycle."
"It isn't a permanent change that is going to drive down margins in the industry because I think that as we move through the interest rate hiking cycle, we'll get to the point where perhaps interest rates stay at a plateaued level or perhaps even drop back a bit, depending on what happens with the global economy more broadly.
"And that will offer the industry opportunity to reprice and the dynamics that flow through that at some point in the future."
In New Zealand, Mr Clare said, loans were moving back towards the long term average of about 80 percent fixed; 20 percent variable.
There had been a slight retraction in mortgage lending, particularly in the Auckland arena which he partly attributed to the high LVR restrictions.
It was also partly due to "seasonality", heading into winter when most people put their houses on the market in spring and summer.