The Bank of New Zealand expects a difficult 18 months ahead as it sets aside more funds to deal with bad loans and the higher costs of funding.
The Australian-owned bank made a profit of $NZ400 million for the six months to March - a decrease of 4% on the same period a year earlier.
Banking operations, which include retail, business, farming, private banking and insurance saw underlying profits fall 5% to $NZ228 million.
Chief executive Andrew Thorburn says he expects to keep increasing provisions for bad loans, as the drivers of the half year result have not gone away.
He describes the environment as "very challenging."
Separately, cash profit at BNZ's parent bank, National Australia Bank, declined 10% to $A2 billion, as higher bad debt charges offset a stronger performance from its banking business.