Westpac has become the second of the big four banks to post a fall in full year profit, with the tax implications of its takeover of St George causing a 15 per cent fall to $5.97 billion.
But the ongoing tax changes, which delivered a $1.1 billion profit in the previous year but a $165 million charge in the year to September 30, masked an improved underlying performance for Westpac.
Its cash earnings in the 12 months to September 30, which takes out one-off financial items, were $6.598 billion, up five per cent from the previous year and above analyst expectations of $6.46 billion.
Westpac shares gained 27 cents to $25.30 by 1015 AEDT.
Last week, National Australia Bank reported a 22 per cent fall in net profit to $4.08 billion because of its struggling operations in the United Kingdom.
Westpac chief executive Gail Kelly said her bank's net profit would have grown by four per cent if the tax impacts of the St George takeover were eliminated from the last two full years.
She said credit growth would remain subdued in the year ahead, while savings are expected to continue to grow strongly, due to weak consumer sentiment.
"We expect both of those trends to continue over the course of this next period," Ms Kelly told reporters on Monday.
"We do expect 2013 to remain a challenging year."
Volatility will continue in global markets, and while Australia's economy is undergoing structural change, it remains stronger than most other developed countries, she said.
Westpac's cash earnings growth came mainly from its Australian retail and business banking operations, where earnings grew by 14 per cent from the previous year to $2.1 billion.
Westpac's loans grew by four per cent to $514 billion and deposits were up seven per cent to $395 billion.
It's net interest margin, a key measure of profitability on its loans and deposits, was down five basis points in the year to 2.17 per cent.
Other divisions of the bank posted more steady results, with St George's earnings flat compared to the previous year, at $1.2 billion.
Westpac's impairment charges in the year to September were up 22 per cent from the previous year to $1.2 billion.
The rise was caused by more bad debts being written off, and was not an indication of growth in newly impaired loans, chief financial officer Phil Coffey said.
"Some companies that are in financial stress and that hadn't gone into impairment have dropped into impaired, as others have either been written off or recovered, So those two things are balancing each other out," he said.
"If you look at our gross impaired assets it's still ticking down, but not at a steep decline.
"If you look at the credit health of the book, it is actually continuing to improve, but we'd say that rate of improvement was slowing through the year." he said.
Mr Coffey said impairments were not expected to rise significantly in the year ahead, as lower interest rates help to offset the impact of the high Australian dollar.
"The strong dollar is continuing to put pressure on companies, but the flipside is that interest rates are lower, so a lot of borrowers have got a bit of a breather from that," he said.
Analysts said bad debt charges were an area of interest for all banks, but Westpac's rise wasn't too concerning.
"Credit quality remains sound but there are some early signs of increasing stress, particularly in small-medium enterprises and sectors impacted by the high dollar and consumer caution, but nothing too alarming," Morningstar analyst David Ellis said.
Westpac declared a fully franked final dividend of 84 cents per share, up from 82 cents a year earlier.