Reserve Bank of New Zealand figures released yesterday show total bank lending rose almost NZ$1 billion in the month of December, and rose at its fastest annual rate in five years in 2012.The figures came as a Dun and Bradstreet survey found New Zealanders plan to borrow more and spend more in early 2013 as signs emerge of a consumer spending recovery despite still high household indebtedness.RBNZ said it was watching credit growth and house price inflation closely and did not want to see inflation or financial stability risks worsened by housing demand getting too far ahead of supply. Economists interpreted this as a more hawkish signal from the Reserve Bank and an indication it was more likely to limit mortgage loan-to-value ratios later in 2013.Household borrowing rose NZ$677 million in December, from November, and was up 3.6 per cent from a year ago. This is an acceleration from annual growth of one to two per cent through the first half of 2012, and came as house price inflation accelerated to reach 10 per cent by the end of the year.The surge in mortgage lending has come as competition has intensified between the government-owned Kiwibank and the Big Four Australian-owned banks, NAB's BNZ, the ANZ, Westpac, and the CBA's ASB. The trigger was ANZ's September 26 announcement that it would drop its National brand and merge its two customer bases into a single set of products, branches and staff. BNZ, Westpac, ASB and Kiwibank almost immediately launched marketing and pricing campaigns aimed at luring any disaffected ANZ and National customers away.Average advertised one-year and two-year mortgage rates dropped around 20 basis points through the final quarter of 2012, coinciding with 38 to 40 per cent annualised growth in mortgage approvals through the 13 weeks between ANZ's September 26 announcement and the last week before Christmas. This mortgage approval growth is larger than the total credit growth because it includes competitive refinancings of existing debt between banks and existing debt moving from one product to another within banks.Meanwhile, PwC published its New Zealand Banking Perspectives publication. This showed that the five banks made a combined profit of NZ$2.17 billion in the second six months of their 2012 financial year, down 11 per cent from the previous six months. Operating costs rose and net interest margins were flat because of the increased competitive pressure. PwC partner Sam Shuttleworth said strong competition and higher regulatory costs had driven down earnings, masking pleasing market growth. "Borrowing rates are dropping as homeowners and businesses aggressively renegotiate interest rates, even in the middle of fixed rate periods. In this competitive environment, the banks are playing ball as they focus on the longer game of increasing the value of their lending books by locking more customers into fixed rate mortgages and an easing of pricing to corporate customers," Shuttleworth said."As the banks compete to attract borrowers in this low growth market, they need to resist the temptation of reducing their interest margins too far if we wish