Australia’s four AA-rated banks collectively suffered a doubling in bad debt charges in their latest financial years but problem loans are forecast to decline in 2009-10 when earnings are set to rebound.

After earlier announcements from ANZ, Commonwealth Bank of Australia, and National Australia Bank, Westpac on Wednesday reported full-year net profits down from A$3.93bn to A$3.52bn. The 11 per cent profits decline came despite a sharp rise in impairment charges, up by A$2.09bn to A$3.29bn.

Gail Kelly, Westpac chief executive, said on Wednesday that the bank’s worst quarter for impairment charges was in the third quarter, or the three months to June, and charges had since stabilised.

Her comments were supported in a sector report from PwC, which said that although bad debt expenses from the four big Australian lenders reached more than A$13bn, the banks managed to limit the fall in underlying earnings to 2.4 per cent.

Australia’s banks have maintained strong capital bases in recent years and navigated the financial crisis better than many international peers. They did not have significant exposure to toxic debt instruments, such as US sub-prime mortgages, and operate under one of the most comprehensive regulatory regimes in the world.

Mike Codling, banking leader at PwC, said the banks had probably passed the “peak in credit losses”, adding that the Australian lenders were likely to have turned a corner after two years of declining earnings.

The PwC banking gauge – which aggregates estimates from bank analysts – predicts that the banks’ underlying cash earnings, which strips out one-off items, will increase by just under 14 per cent in 2009-10.

Mr Codling said the banks’ emphasis on balance sheet strength, particularly on raising capital on international wholesale markets and via equity issues, had resulted in their combined average return on equity falling to 13.1 per cent in 2008-09, compared with an average 16.6 per cent in the previous year.

The banks earned combined underlying cash profits of A$18bn in 2006-07, A$17.5bn in 2007-08 and A$17bn in 2008-09. Between 2006-07 and 2008-09, bad debt expenses increased five-fold from A$2.4bn to A$13.2bn.

“If bad debt expenses return to more ‘normal’ levels in the future, the banks appear well positioned to improve their earnings,” Mr Codling said.

Australia’s banks managed to limit the decline in their latest full-year earnings by increasing margins. For the first time since 1995, aggregate net interest margins rose in the full year, up from 2.07 per cent to 2.22 per cent.

Mr Codling said there were clear downside risks to future margins.

Margins could be eroded by greater competition for deposits, proposed new prudential rules for liquidity requirements and further disruption in wholesale credit markets, he said.