“When [interest] rates keep falling, it gets to the point where you can’t keep reducing those [deposit] rates,” Huggins said.

“Your costs don’t move, but the revenue you’re earning on interest bearing assets [i.e. mortgages] will keep going down.

“You start to get to a point where you can’t compress the costs because you can’t keep dropping the deposit rates, but on the revenue side of the business, you do keep dropping there and that causes margin compression.”

Around 60% to 70% of BNZ’s funding comes from deposits. The remainder comes from wholesale markets.

Another factor that prevented BNZ from increasing its profitability, despite it doing more business, was that it kept its impairment charges elevated.

While it reduced its provisions for possible future defaults, it took a hit from a “small number of large corporate and agribusiness customers” running into trouble.

Indeed, BNZ only decreased its credit impairment charge by $12 million to $141m.

In contract, Westpac, which released its result on Monday, slashed its credit impairment charge by $108m to $27m. Its profitability would’ve been flat (rather than up) had it not made this revision.

Huggins said the economic recovery was still in its infancy.

“Whilst we’re at the bottom of the cycle, it’s still early in our view,” he said.

“The environment is still quite subdued. There is a wee way to go before we’re going to be through the full extent of the economic cycle. Probably another 6 to 12 months.

“We just think it’s prudent to hold the position we’ve got, as we see how things move from here.”

In the 12 months to 30 September 2024, BNZ was the largest lender to New Zealand’s productive sector, with almost half of New Zealand’s total business and agricultural lending growth coming from BNZ.

Huggins also made the point that because BNZ lent more, its provisions for bad debts had to be adjusted accordingly.

BNZ increased its home lending by 4.2% and business lending by 4.6%. Its deposits also grew by 4.8%.

Huggins acknowledged households and businesses would welcome the fact interest rates are starting to fall as inflation returns to the Reserve Bank’s target band.

“However, there is always a lag between changes in monetary policy and its impact on the economy, and it will take some time for the benefits to flow through,” Huggins said.

“For customers feeling under pressure, our message is ‘get in touch’.”

Huggins said borrowers were largely opting to fix their debt at short durations, in the hope interest rates would fall soon.

“Over 70% of our home loan customers are due to roll off their fixed term loans within the next 12 months,” he said.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.