The head of ASB Bank says falling numbers of loans gone bad are a positive sign for the economy.

ASB has posted a record-breaking profit of $685 million for the year till June, up 21 per cent from $568m.

The bank reduced its impairment losses by 35 per cent to $47m, after last year including a provision for customers affected by the Christchurch earthquake.

ASB chief executive Barbara Chapman said the "strong reduction" in bad debt was good for the economy. "The New Zealand environment is obviously at the point of recovery, to the extent that customers are able to go about their business and do quite well," Chapman said.

Some customers were deleveraging and generally saving more than they were five years ago, which was a good thing, she said.

Customer deposits increased by 7 per cent during the year, outstripping the stale growth in mortgage books.

Meanwhile, business lending had a "marked increase" of 6 per cent.

Even after adjusting for inflation, ASB's profits have doubled in the space of just eight years.

ASB's parent company, the Australian listed Commonwealth Bank (CBA), also announced a bumper return of A$7.09 billion (NZ$9.24b) yesterday.

Asked about New Zealand profits draining across the Tasman to Australian shareholders, Chapman said ASB had reduced the level of dividend that it paid to CBA in the second half.

That was aimed at meeting new capital adequacy requirements, but she said ASB also continued to invest heavily in New Zealand. Another factor underpinning the record profit was a rise in operating income, driven by a move to the more profitable floating mortgage rates.

Chapman said media coverage in June had led some customers to temporarily swing back towards fixed rates.

- © Fairfax NZ News