Westpac says the major banks' cost of funds has fallen about 200 basis points less between July 2008 and March this year than the average level of Reserve Bank governor Alan Bollard's official cash rate (OCR) over the same period.
It also estimates pre-tax profits from banks' retail operations are down 40% in the year ended March.
Westpac is basing its calculations on the major banks' quarterly general disclosure statements (GDSs) over that nine-month period (Westpac is the only major bank not to have published its March quarter GDS yet).
It says net interest margin, measured as interest income less interest expenses as a percentage of interest-bearing assets, has fallen from 2.28% in December 2007 to 2.17% in December 2009.
"We estimate there was a further slight narrowing at the start of this year," Westpac says.
It says Reserve Bank figures showed bank margins increased in the December quarter but that increase was entirely due to one investment bank with no retail operations in New Zealand reporting an unusually large margin for the quarter.
The central bank's monthly figures show the spread between lending and funding rates has widened since late 2008, although these figures include only New Zealand dollar funding.
Westpac says about 30% of bank funding is in foreign currencies and has become relatively more expensive. The central bank's figures also fail to take into account the impact of hedging which has had a significant impact on funding costs.
Banks have also raised the interest rates they pay on on-call and term deposits rather than fully pass on OCR cuts, it says.
Rather than exploiting their New Zealand customers, the major banks, which are all Australian owned, have similar net interest margins to their Australian parents, Westpac says.
