Commonwealth Bank of Australia's New Zealand unit, ASB, reported a nine per cent drop in cash net profit in the second half of the year after it increased its bad loan provisions by NZ$48 million, mostly due to an increase in impaired dairy loans.Dairy farmers face a third consecutive year of unprofitable milk payouts because of over-production in Europe and a slowdown in demand from China, which is the biggest importer of New Zealand's milk powder.ASB reported a cash net profit of NZ$433 million for the six months to June 30, which was down from NZ$475 million in the first half of the financial year. CBA reported in its presentation to analysts that A$245 million or 3.3 per cent of its A$7.4 billion worth of dairy loans in New Zealand were classed as impaired at June 30, which was almost double the A$124 million classed as impaired a year ago.ASB Chief Executive Barbara Chapman told Banking Day in an interview that the majority of the increase in total provisions in the second half to NZ$89 million came after an annual reassessment of ASB's dairy loans after two years of very low payouts. Chapman said the impairments were not surprising given the current payout forecast for NZ$4.25 a kilo, which is below the estimated break-even level for dairy farmers of NZ$5.05 a kilo and represents a third consecutive year of sub-NZ$5 a kilo payouts. But she said ASB remained confident the payout would improve to around NZ$6 a kilo by the middle of next year and that write-backs of these provisions were possible in future."We have been through cycles of provisions, but often we would write those back. Over the last ten years we've written off NZ$40 million across our entire agricultural book," Chapman said, noting that ASB had not put any dairy farms into receivership over the last year. "It's been longer than anybody would want, but we're heartened by the fact our customers are responding well and are reducing their costs a lot and that farm prices have held up."Elsewhere, ASB's net interest income also fell in the second half of the year from the first half despite strong growth in lending as its net interest margin fell to 2.32 per cent from 2.38 per cent a year ago. Mortgage lending grew five per cent between the first and second halves of the year, which was in line with overall banking system growth, while business and rural loans grew six per cent, which was faster than overall system growth.Chapman said she was comfortable with ASB's exposure to the Auckland housing market, where loan to income multiples had risen to over nine, and which prompted ANZ New Zealand CEO David Hisco to comment last month that the market was "over-cooked."She said ASB had been cautious in Auckland in the last three to four years and its market share had been lower over the last year than its traditional market-leading position.ASB had not allowed its loan durations to increase and had