By Byron Kaye and Himanshi Akhand
(Reuters) -National Australia Bank, the country's No. 3 lender by total loans, reported on Friday that profit fell in the June quarter as inflation pushed up costs and stoked competition, but said that a measure of core operating margins held steady, sending its shares higher.
The company, which is Australia's top business lender as well as a top-tier mortgage provider, warned of a deterioration in its business banking portfolio where "non-performing" loans reached the highest in at least two years.
But it said in a limited third-quarter trading update that its net interest margin (NIM) - a closely-watched measure of bank performance which compares interest payments received on loans minus interest paid out to deposit holders - had held steady since the first two quarters.
Underlying profit dipped 8% to A$1.75 billion ($1.16 billion) from the same three months a year earlier, but met analysts' expectations, based on halving the average forecast of second-half profit compiled by market data aggregator Visible Alpha.
Analysts seized on the NIM figure as a sign the bank may make its way through a price war since 2022 where rising interest rates and inflation have prompted lenders to sacrifice margins to lure more customers.
Shares of NAB were up 1.5% by mid-session, in line with the broader Australian market, as investors overlooked some weakening in the bank's loan quality and focused on its core profit measure.
"Little signs of deterioration in NIM versus market expectations is what is likely to keep the market encouraged so far," said JPMorgan brokers in a client note.
Australia's banks said initially after interest rates began rising that most borrowers were able to make repayments, but have recently reported rising financial stress. NAB said on Friday its asset quality deteriorated further in the June quarter.
The bank said its ratio of "non-performing exposures to gross loans" was 1.31% at June-end, up 11 basis points since March and the highest since at least September 2021. The bank didn't publish a comparable metric earlier.
The increase reflected "continued broad-based deterioration in the Business & Private Banking business lending portfolio, combined with higher arrears for the Australian mortgage portfolio", it added.
NAB, which has 23% of Australia's A$1 trillion business lending market, is the most exposed of the country's so-called Big Four banks to a surge in companies entering external administration which reached a record in the year to June, according to Australian Securities and Investments Commission data.
($1 = 1.5097 Australian dollars)