ANZ chief executive Mike Smith yesterday questioned the sustainability of conditions in the Australian retail banking market. The combination of high deposit rates, competitive mortgage pricing and reductions in transaction and penalty fees has resulted in a "very good deal" for consumers but not such a good one for ANZ.At a time when the big four are supposed to be cleaning up in a market that is short of serious competition, ANZ's earnings from its Australian retail operation have fallen.The profit contribution from Australian retail was $744 million in the March half, down one per cent on the $755 million of profit for the division in the September half. The result was up 18 per cent on the previous corresponding period.Changes to fees cost the bank $55 million in revenue. Last September the bank announced a reduction in overdrawn and dishonour fees from $35 to $6 on all personal transaction accounts. Over-limit and late payment fees on credit cards were cut from $35 to $20.Smith said the bank would continue to compete for market share, despite suffering margin contraction in the Australian retail business. He said: "It would be a brave decision to lose market share in the short term. You have to look long term. Some of the pricing of deposits will ease. It is a question of when."I think the market will adjust. It normally does."The silver lining in the cloud was that the bank was able to diversify its funding by picking up more deposits from Asia. Customer deposits in Australia fell by one per cent in the six months to March, while the deposits sourced in Asia Pacific, Europe and America grew 34 per cent.Smith said: "We are looking for alternative deposits. That is where our strategy makes sense."The bank reported a group net profit of $1.9 billion for the six months to March, an increase of 36 per cent over the previous corresponding period.ANZ's preferred measure is underlying profit, which was calculated after adjusting for $322 million of acquisition costs and $138 million hedging losses. Underlying profit for the half was $2.3 billion, an increase of 20 per cent over the previous corresponding period.The quality of the result was undermined by growth in expenses outstripping growth in income. Using underlying profit, operating income of $7.5 billion was seven per cent higher than the $7.04 billion of income in the previous corresponding period, while the $3.2 billion of operating expenses was up 10 per cent on the previous corresponding period.Earnings per share were up two per cent on the previous corresponding period. Return on equity was 14.7 per cent, compared to 12.5 per cent for the September half and 14.1 per cent for March last year (and using underlying profit to work out this ratio).The good news was that bad debt charges fell substantially. The provision for credit impairment was $1.1 billion, down 32 per cent on the September figure and down 23 per cent year on year.The bank's net interest margin was up from 2.53