A survey of the banking sector suggests modest lending growth and the possibility of further credit downgrades may curb earnings growth at the major banks over the coming years.
The latest Banking Perspective report from PWC says profits at ANZ, ASB, BNZ, Kiwibank and Westpac rose a modest 1.1% to $1.3 billion in the first half of 2011.
PWC banking analyst Sam Shuttleworth says the modest result is due to a sluggish recovery and February's earthquake, which have pushed up bad debts.
Mr Shuttleworth says the banks, while financially solid, face challenging times in terms of competition and funding pressures.
He says the answer is for the banks to "grow the book" and for that to happen the New Zealand economy needs to be kickstarted.
The rebuilding of Canterbury will provide some initial impetus, he says, while strong Asian demand for food will underpin growth over the longer term.
However, he says growth in the New Zealand banking sector is likely to be modest compared to Asia, where the Australian owners of the country's banks want to expand.
Moody's downgraded all four Australian-owned banks in May, partly because of their reliance on foreign funding, and Standard & Poors could follow suit.
If that happens, Mr Shuttleworth says, it could push up borrowing costs for households and firms.