PwC said cost-cutting remains at the top of the banks' agendas to increase productivity and protect margins. It said this may involve an accelerated shift of back-office jobs offshore to cut costs further.
The global consulting firm found Australian banks delivered "solid'' annual earnings in contrast to many of their US and European peers.
This was despite Australian banks' results being dented by large bad debt expenses, slowing credit growth and contracting margins.
PwC said Australian banks maintained their discipline in managing spreads between lending and borrowing rates, which went some way to cushion an 11 basis point erosion in net interest margins.
Margins had contracted as the credit crisis drove funding costs higher and forced institutions to hold a higher levels of liquid assets.
PwC said salary rises and larger headcounts, mainly in frontline roles, led to a 5.1 per cent blowout in aggregate costs.
The report also found significant hikes in credit losses had caused damage to balance sheets.
Credit losses jumped 174 per cent to $6.6 billion for fiscal 2008, representing 41 basis points of total loans - a level not seen since 1994, PwC said.
PwC banking and capital markets leader Mike Codling said impaired assets more than doubled for fiscal 2008 due to the liquidity crunch and emerging economic downturn.
"Genuine fears remain for the immediate future,'' Mr Codling said.
"If steps to unfreeze the lending pipes are unsuccessful and credit rationing by the banks continues, there could be some real stress across businesses,'' he said.
"The institutions that can take out costs without compromising service quality or distribution reach will emerge in the best position.''
He said moves to send positions offshore, or move back-office jobs to large processing centres in countries with cheaper labour, may be accelerated to cut costs.
The report found Australian major banks' wealth management arms fared better than non-bank competitors, lifting their market share of funds under management by 70 basis points in the six months to June 30 - despite the sharemarket slide.
Banks' market share of funds under administration increased by 40 basis points during the same period, PwC said.
Funds under management includes management of all forms of institutional and private client investment management. Funds under administration refers to funds managed by investment platforms.
AmSouth mutual fund probe ends in settlement
