Bad debt expenses for Australia's four major banks, all of which have significant operations in New Zealand, nearly trebled to a 16-year high in the six months to March.
The bad debt expenses rose to $6.5 billion, while in the same period, total bad debt provisions doubled to $16.3 billion.
PricewaterhouseCoopers Australia banking and capital markets leader Mike Codling said the significant rise in bad debt expenses was not surprising.
"We've seen the collapse of some large highly-geared corporate borrowers and now we're starting to see the broader impacts of the economic recession, with some pain coming through the small to medium-size business exposures.
"Clearly, the level of write-offs is going to increase considerably."
Given the level of balance sheet provision now in place, it remained an open question as to whether the level of expenses would rise again.
During the next few periods, a key determinant would be the extent to which unemployment and under-employment would continue to rise, he said.
Despite the increase in bad debts, the four major banks - ANZ, Westpac, Commonwealth Bank and National Australia Bank - delivered a "very credible" set of half-year earnings amid deteriorating economic conditions, scarcity of capitals and rising unemployment.
The majors achieved underlying cash earnings of $8.4 billion, a 6% reduction over the previous corresponding period.
Underlying cash earnings excluded significant non-recurring items in an attempt to reflect profits normally available to the shareholders.
They could include gains or losses from the sale of assets or significant expenses related to restructuring, transformations and acquisitions.
Mr Codling said the majors had delivered a strong result and proven their resilience in the wake of a softening domestic economy and global banking crisis.
Compared to the extraordinary losses experienced by banks across the United Kingdom, United States and Europe, Australian's big banks fared extremely well, he said.
PWC New Zealand financial services partner Paul Skillender said the results from Australia boded well for the New Zealand banking market.
"In the US and the UK, the losses incurred by banks have led to an overall decline in capital, which has forced many to the brink and beyond.
"However, the good news for Australian banks, which in turn impacts New Zealand banks with Australian parents, is that we are seeing a reduction in profit as opposed to a decline in capital.
"Although this is a clear sign that the global downturn is having an impact on banks in Australia, it is less severe than what we've seen in other markets."
The slowing of demand for credit in the coming year would likely be a restriction on income growth for the banks.
Total system credit growth in the March quarter was only 0.4%.
With business loans, in particular, continuing to be repriced upwards, credit growth threatened to dip into negative territory, Mr Codling said.
"Nowhere is the impact of the economic environment more evident than in relative growth rates of deposits and lending.
"While lending has consistently grown more quickly than deposits for more than two decades, the opposite is now true."
In the six months to March, household deposits in all banks grew by 11% while total credit grew by 1%.
The growth rate for deposits was expected to slow during the rest of the year, reflecting a reduced flow of funds from other investments (especially shares) together with increased pressures on both household and business cash-flows due to the recession, he said.
Bank competition for deposits would remain intense as they looked for stable and lower cost alternatives to wholesale funding.
