National Australia Bank has recorded a strong lift in its cash profit to $7.7bn, while flagging that strong competition for mortgage customers has started to depress margins.
The cash result, up 8.8%, was booked during a 12-month period of fast-rising interest rates that has helped the wider banking sector print profits by increasing borrowing rates at a faster pace than deposits.
Banks also started to more aggressively fight for market share this year by offering cash incentives for borrowers to switch, although that practice has now largely ended.
NAB’s chief executive, Ross McEwan, said he still expected six more months of strong competition as mortgage holders coming off fixed rates seek the best deal.
“That market remains competitive for us,” McEwan said on Thursday. “To say that competition has backed off, I just don’t think that’s the case.”
NAB’s results for the 12 months to the end of September show that profit margins for its mortgage book have eased in the last six months.
Over the full year, the lender’s chief gauge of profitability, net interest margins, still expanded by nine basis points, matching results released this week by its rival Westpac.
NAB’s financials show that an increasing number of people are falling behind on their loan repayments, although the level of arrears remain modest on a historical basis.
The bank’s credit impairment charge increased $677m across its lending portfolio, as borrowers grappled with a fast-paced series of rate rises since May last year.
At the same time, NAB customers actually increased amounts in their offsets and redraw facilities during the year, despite paying significantly higher mortgage rates.
There are mixed views in the analyst community on what the modest level of arrears and delinquencies say about Australian mortgage holders.
“Are households coping better than expected, or is the stress simply building up to a major shake-up next year,” one analyst told Guardian Australia on Thursday.
McEwan said the bank’s mortgage book was in “good shape”. “They are still in a position to be able to pay, which is great,” McEwan said, referring to mortgage customers.
“House prices are going up which helps them so if they do need to sell it’s a good market for doing so.”
The official cash rate now sits at 4.35% after the Reserve Bank hiked it again on Tuesday, in the central bank’s 13th rate rise since May last year.
NAB immediately passed on the quarter-point increase to mortgage holders, while increasing the rate for savings and deposit accounts.
Shares in NAB traded slightly lower on Thursday morning as investors reacted to the financial report and digested warnings of tougher conditions ahead.
The bank said growth was slowing, competitive and inflationary pressures were elevated, and asset quality was deteriorating.
“We expect further challenges as the economic transition continues, but we remain confident in the outlook,” the bank said in an outlook statement.
Australia’s second biggest lender declared a final dividend of 84 cents a share, up from 78 cents a year earlier.
