By Sameer Manekar and Praveen Menon
(Reuters) -National Australia Bank on Thursday posted a 19% jump in first-quarter cash profit helped by rising interest rates, but the lender warned of headwinds as house prices soften and borrowers get squeezed by rising living costs.
Australian banks are expected to post strong earnings in the high interest rate environment, but the lenders' run is set to fade later this year as a cooling economy is expected to result in slower credit growth and more bad debt.
"The higher interest rate environment, resulting from central bank actions to curb inflation, has benefited our revenue this period," NAB Chief Executive Officer Ross McEwan said.
"But this is also causing economic growth and house prices to soften, and loan repayments to increase. We know these changing circumstances, combined with cost of living pressures, will create difficulties for some of our customers...," he added.
After eight rate hikes through 2022 and a further quarter-basis point raise last week, the central bank has indicated more tightening ahead to stamp out inflation. Soaring rates have cooled the housing market and added to rising cost of living pressures.
NAB took a $158 million credit impairment charge, up 23% compared to the quarterly average in the second half of last year, which it said reflected the impact of lower house prices and business lending volumes.
Earlier in the week, country's biggest lender Commonwealth Bank of Australia (OTC:CMWAY) delivered record half-yearly profits but warned of headwinds facing its mortgages business and concerns its margins may have peaked.
For the first-quarter ended Dec. 31, NAB said net interest margin, a key measure of profitability, rose 12 basis points to 1.79% in the reported quarter, while its common equity tier 1 (CET1) ratio was at 11.3% as of Dec. 31, compared with 11.51% as of Sept. 30.
"Today’s result should provide some comfort that NIMs still have tailwinds from rising rates should asset pricing issues be managed appropriately," Citibank analyst Brendan Sproules said in a note.
“Having said that, we maintain our view that NIMs should peak in the second half of 2023, and, consequently, we remain close to an inflection point.”
NAB posted cash earnings of A$2.15 billion ($1.48 billion) for the quarter ended Dec. 31, compared with A$1.80 billion a year ago. Analysts had expected cash earnings of $2.01 billion, according to Visible Alpha consensus.
The ratio of bank's stressed loans, interest payments on which are delayed for over 90 days, to gross loans and acceptances fell to 0.62% as of December-end from 0.66% in September-end.
($1 = 1.4480 Australian dollars)