Australia's largest banks warned that intensifying competition after a rise in interest rates would squeeze their profit margins.

National Australia Bank Ltd. (NAB) and ANZ Group Holdings Ltd. reported higher first-half earnings, aided by rate hikes, but said rivalry for customers, especially retail, would climb. NAB's profit in the October-to-March period rose 17% to A$4.07 billion, while ANZ Group's cash earnings grew 12% to A$3.82 billion.

"I would describe it as a good, strong set of results," Rob McEwan, NAB's chief executive, said in a May 4 video message discussing the first-half results. Still, the CEO noted that margins have started to decline after steady growth since interest rates started rising. "You've seen that the net interest margin is starting to reduce slightly again, and the competition is very strong in the deposit end of the marketplace and putting pressure on net interest margin," McEwan said.

The Reserve Bank of Australia has hiked rates 11 times since May 2022 to curb inflation. It lifted rates 25 basis points on May 3 to 3.85%, signaling a pause soon. The US Federal Reserve also tightened rates this week, dividing analysts over when it would signal a pause.

NAB's core divisions reported higher earnings for the six-month period, with business and private banking generating a 19.9% increase in profit to reach A$1.71 billion and corporate and institutional banking achieving a 16.6% rise to A$940 million.

"All of the business [has] been growing up until the last six months, helped by interest rate movement for the first time in 12 years going up, not down," McEwan said.

"National Australia Bank's earnings will remain sound over the next two years, despite increasing margin pressure," S&P Global Ratings predicted in a May 4 note. "While the bank's net interest margin across the half increased 13 basis points to 1.80%, its NIM for the most recent quarter was down 4 bps. This reflects increasing funding costs and strong competition in the Australian mortgage market despite rising interest rates."

Intense competition

ANZ CEO Shayne Elliott cautioned that "the next six months will be more difficult than the last. Competition in retail banking is as intense as it has ever been, both in Australia and New Zealand."

"What you're seeing in the marketplace, despite lots and lots of competition, better outcomes for customers in terms of price, some of the players, not us today, but some of the players are questioning their commitment to that market and sort of stepping back a little bit and saying, maybe we don't want to put so much capital into it," Elliott said with regard to Australia's mortgage market.

Nonetheless, in a May 5 release, Elliott characterized the bank's results as "a strong financial performance in which all four divisions made a material contribution."

ANZ's net interest margin increased to 1.75% from 1.58% in March 2022 and 1.68% in September 2022. The lender said net home loan advances hit A$295 billion as of March 31, up from A$278 billion a year earlier.