BNZ chief executive Andrew Thorburn has defended the rising bank profits saying tougher rules to protect the financial system means that they have to hold more capital.
The Australian-owned bank made cash earnings, which exclude one-off items and unrealised charges, of $385 million in the six months to March, an increase of 17% compared with the same period a year earlier.
BNZ's net interest margin rose to 2.41% from customers switching to more lucrative floating mortgage rates, and its return on assets jumped to 1.3%.
Mr Thorburn says those margins are needed to build up capital buffers and ensure a strong credit rating to allow it to borrow overseas, and to invest in its operations.
He says margins fell quite dramatically after the global financial crisis and are now back to sustainable and required levels.
BNZ lifted its share of the retail deposit and farm lending markets, and Mr Thorburn says the subdued recovery also led to a decline in the amount set aside to cover potential bad loans, which fell by two-thirds to $34 million.
Mr Thorburn says the recovery will continue to stutter along and financial markets will continue to have bouts of doubt about Europe's ability to deal with its debt mountain.
But he says the New Zealand economy is slowly improving, export markets remain reasonably positive although offset by the higher exchange rate and it's hoped savings will continue to be generated by New Zealanders.
The bank's parent, National Australia Bank, experienced a 5% rise in its half year cash profit to $A2.8 billion.
In total, half year profits for major banks BNZ, ANZ, Westpac and ASB jumped about 28% to $1.8 billion.
This has been criticised as excessive, given households and firms are still struggling.
However Mr Thorburn defends the need for a profitable banking sector and says a big factor in rising profit is that banks are having to set aside less money to cover potential bad debts.
He says asset quality improvements have helped the cash earnings improvements of most banks in the last 12 months, which he says is a one-off phenomenon.