The Bank of New Zealand's first half earnings have fallen to $255 million - a drop of 8.6% compared to last year.
However, compared to six months ago the figure represents a 7% rise.
Despite bad debts falling, the bank says its profits have been squeezed by higher funding costs, weak demand for business credit and intense competition for deposits.
New requirements by the Reserve Bank for banks to source more of their funding from local deposits to reduce their reliance on expensive overseas funding has also come at a cost.
BNZ managing director and chief executive Andrew Thorburn says as a result of this, competition for deposits is intense.
Mr Thorburn says he believes the worst of the recession is now over and New Zealand is on track for a steady recovery though he says there is still some risk, particularly in the business sector.
BNZ set aside $88 million dollars to cover bad debts, down 11% per cent on last year. However the bank says it may have to increase provisions for bad debts, because the outlook for the next 18 months remains tough.
Meanwhile, BNZ's owner, the National Australia Bank, reported an 8.2% rise in first-half cash profit as bad debts fell sharply.
It says it is still pursuing a $A12 billion dollar take-over of the wealth manager AXA Asia Pacific.