The world’s beleaguered financial markets are slowly recovering from the doldrums of the economic downturn, ANZ chief executive Mike Smith says.

But it does not necessarily mean banks will pass on to borrowers further cuts in official interest rates, he warned.

Despite ANZ reporting a 28 per cent plunge in first-half profit on Wednesday due to bad debts and losses on derivative trades, Mr Smith said the worst was behind the financial sector.

“But we are not out of the woods yet,” he told ABC Radio on Thursday.

There would be a degree of volatility as credit spreads kept “going up and down … in the debt markets”.

While there was no silver lining to the global economic crisis, Australian banks were weathering the storm better than most of their overseas counterparts.

The government’s two stimulus packages and boost to the first home owner grant had helped prop up the banking industry somewhat, Mr Smith said, adding a degree of turnover and activity in the housing sector had been maintained.

Banks had also picked up “a little bit” of business from the overall spending packages.

Mr Smith predicted official interest rates may fall again, but couldn’t promise the cuts would be passed onto borrowers.

“It’s a question of what we can do at the time,” Mr Smith said.

AAP