AUSTRALIA'S big banks have been ranked the most profitable in the developed world for the second year running by the influential Bank for International Settlements.

Despite slower credit growth threatening to crimp local lenders' profits, the big four banks enjoy wider interest margins and lower costs than most of their overseas peers, the annual report of the Switzerland-based institution shows.

The Commonwealth Bank, Westpac, ANZ and NAB posted pre-tax profits equal to 1.19 per cent of their assets in 2011, says the report, to be published today. This was the highest level of profitability among banks from 13 nations included in the annual survey of bank profits, after the big four also topped the BIS profit league tables in 2010.

Canada's banks, which also dodged the worst of the global financial crisis, were the next best performers, with profits equal to 1.08 per cent of assets.

At a time when banks are under fire for failing to pass on official interest rate cuts in full, the report is likely to focus attention on big bank profits, which hit $12 billion in the first half of the 2012 financial year.

Banks have played down the large headline figures, saying they face a squeeze from slower credit growth and tougher capital standards, which will raise costs.

CommBank, the country's largest lender, also told a Senate inquiry this month that the sector's return on equity was lower than banks in Indonesia, China, Russia and India.

''While Australia's banking system ranks well by international standards for profitability, it falls far short of the top-performing international systems,'' its submission said.

The BIS - known as the central bankers' bank - has not included banks from developing markets or some smaller economies. However, its analysis shows Australian banks have benefited from higher interest margins and lower operating costs than most of their peers.

As a percentage of assets, net interest margins in Australia were 1.83 per cent, the fourth highest behind the US, Spain and Austria.

Banks have cautioned that net interest margins, while important, are only an indicator of profit, as margins can be inflated if banks choose to horde capital - a problem in the US.

Australian banks' operating costs and loan loss provisions as a percentage of assets were the fourth and sixth lowest among the countries included.

The BIS said many global banks were still in the process of writing down assets, which could lead to more taxpayer funds injected into the sector. In the longer term, it said new capital rules could put pressure on banks to rein in their costs.

''Since the new regulatory environment will put pressure on their profitability, banks will need to adopt more aggressive cost management strategies than in the past,'' the report said.