The switch from floating to fixed interest rates mortgages has impacted Westpac New Zealand's net interest margin,which fell six basis points in the 2014 financial year.

Net interest margin is the difference between what interest the bank charges for loans and what it has to pay for the money. It fell to 2.27 percent in the year ending Sept. 30, from 2.33 percent a year earlier, reflecting narrower margins on home loans.

Chief financial officer Leigh Bartlett said Westpac NZ had a two basis point improvement in the margin in the second half of the year, although the annual drop showed how competitive the market was for mortgage lending.

"While the market will remain competitive we're expecting a stable outlook for the net interest margin," Bartlett said. "We believe the lending spread will continue to go down while wholesale funding costs and deposit spreads continue to improve."

Westpac New Zealand, the local unit of Australia's Westpac Banking Corp, posted a 13 percent increase in annual cash earnings to $864 million, buoyed by a 78 percent drop in bad debts to just $26 million, which the bank put down to improved credit decision making, better management of stressed loans and an improved economy.

David Tripe, the head of Massey University's School of Economics and Finance, said none of the profits reported in the past week by three of the big four banks actually showed a great improvement in performance. In the case of Westpac, he said if you added back in impairments, the result was similar to last year's performance.

"There has been a shrinkage in their effective revenue stream and the big factor is competition and the switch to fixed interest rate loans which is squeezing margins."

Tripe said returns to savers were not going up that much because a lot of the gains in funding costs had been transferred to borrowers on fixed rates.

Westpac's overall lending rose 5 percent during the year to $61.6 billion. Agriculture lending was up by 6.3 percent, 2.2 times ahead of the industry's average growth. Mortgage lending was up 5.4 percent, 1.2 times ahead of system. Westpac has an estimated 20 percent share of the mortgage market.

Acting chief executive David McLean said lending growth came from a mix of increasing the overall pie and stealing some market share off competitors.

Deposits rose 6 percent to $49.4 billion. This funded over 90 percent of the lending growth and helped the bank maintain a deposit-to-loan ratio of 76.5 percent.

Over the past two years the trend towards digital banking and self-service increased. About a third less deposits were made over the counter at branches and mobile usage increased 229 percent. One in five Westpac customers now banks on a mobile device and McLean expects that to grow to 80 percent of customers by 2020. Some 40 percent of credit card applications are now made online along with 10 percent of home loans.

The New Zealand unit contributed 10.4 percent to its Australian parent's record profit of A$7.6 billion. Westpac, Australia's second-largest bank, announced a final fully franked dividend of 92 Australian cents per share, taking total dividends for the year to A$1.82, up 5 percent on the previous year.