ASB has reported its after tax profit fell 17.5% to NZ$425 million in the year to June 30 after its net interest margin fell and its bad debts rose 495% to NZ$238 million.

Issuing a defense of its profit, ASB said it had increased lending and lifted term deposit returns while its parent Commonwealth Bank of Australia had reinvested a further NZ$275 million in capital into the New Zealand bank. It said its profits were not out of line with other New Zealand companies and needed to remain strong to retain ASB's AA credit rating.

"While our profit may appear to be large, despite being significantly reduced, it should not be viewed in purely absolute terms or in isolation from other relevant industry measures," ASB said. "As a major New Zealand registered bank, ASB has a substantial asset base to support and a strong capital base to maintain. ASB's return on assets is 0.68 percent, and our return on equity is 14.9 percent," it said.

"Both numbers are low to average compared to other major New Zealand companies. The profit ASB makes represents the return due to our shareholders for investing in our business. In this respect, the common perception of an Australian shareholder bank reaping profits for its own benefit is far from the reality," it said.

"In truth our underlying shareholders are the 777,000 Australians and New Zealanders who hold 80 percent of the shares in CBA, both directly and indirectly through pension, superannuation and other managed funds. They need to derive a reasonable return on their investments to help them to achieve their savings and retirement aspirations."

ASB said its higher wholesale funding costs and hot competition to win local term deposits meant there had been intense pressure on net interest margins.

ASB's net interest margin fell 21 basis points from 1.78% in June 2008 to 1.57% as at June 30 this year. This contrasts with comments from the Reserve Bank and some others that bank margins had risen.

ASB's total lending rose 4.4% to NZ$53.4 billion, including home loans rising 3.5% to NZ$37.7 billion. ASB said its market share was steady 23.3%. Rural, commercial and corporate lending rose 7.7% to NZ$13.5 billion, although ASB did not break out immediately how much of that was business and how much was farming.

Total deposits rose 5.1% to NZ$56.7 billion with retail deposits growing 8% to NZ$30 billion. Market share in deposits was steady at 21.2%.

ASB paid the government a NZ$18.3 million fee for its inclusion in the Retail Deposit Guarantee Scheme and was critical of the scheme's reliance on the big four banks to pay to insure other riskier institutions such as finance companies.

"The bulk of the fees for this guarantee are paid by the four largest New Zealand registered banks, even though they are amongst the least risky of the financial institutions in our country," ASB said.

ASB said loan arrears had increased and there had been a significant downgrade of credit risk ratings across all its loan portfolios. ASB lifted its loan impairment charge by NZ$198 million to NZ$238 million.

"While this is a significant increase compared to recent years, provisions still represent only 0.40 percent of total assets (0.18 percent in June 2008)."