National Australia Bank eyes business credit in soft home loan market

By Byron Kaye and Roushni Nair

SYDNEY (Reuters) -National Australia Bank, the country's top business lender, said profit outside of home loans grew in the September half even as inflation squeezes margins and credit quality, sharpening its focus on non-mortgages business for growth.

Australia's banks for years seized on low interest rates and soaring property prices to make most of their profit growth selling mortgages, but 13 interest rate hikes in 1-1/2 years and the expiry of millions of fixed-rate home loans have spurred competition that has flattened margins.

That has left NAB, ranked third for mortgages but first for business loans, in a prime position as the country's retail lenders look elsewhere for growth. Demand for business credit, which typically has higher margins, has surged with consumer demand.

NAB said in the financial year ended Sept. 30, its business and private banking unit grew profit by 21.6%, including an 11.2% jump in the second half compared to the same period a year earlier. Profits in personal banking, which includes mortgages, shrank by 10.2% in the second half.

"I don't see us pushing heavily for great growth in the mortgage market over the next 12 months," NAB CEO Ross McEwan told reporters, noting the bank deliberately grew its mortgage book slower than the market.

"There are much better returns for the bank in other parts of our portfolio. We're not abandoning (mortgages), we're tilting towards our business bank."

Total annual cash profit of A$7.7 billion ($4.9 billion), up 8.8%, came in just under a A$7.8 billion average forecast of analysts polled by data aggregator Visible Alpha. Larger mortgage rival Westpac also posted a higher annual profit on Monday, despite a decline in home loan profit.

Shares of NAB rose 0.8% by mid-session, in line with the broader market, as analysts praised the business unit's performance but noted NAB's exposure to mortgage lending and a pickup in arrears may create headwinds.

"On the asset quality front, we expect the modest deterioration coming through to result in nervousness about asset quality going forward," E&P Financial analyst Azib Khan said.

The company's net interest margin, a closely-watched bank metric of lending interest income minus payouts to deposit accounts, shrank to 1.71% as of Sept. 30, from 1.77% at March-end.

The bank's credit impairment charge of A$802 million was up from A$125 million a year earlier, reflecting worsening asset quality.

NAB declared a final dividend of 84 Australian cents per share, up from 78 Australian cents apiece a year earlier.

($1 = 1.5618 Australian dollars)

(Reporting by Roushni Nair and Archishma Iyer in Bengaluru; Editing by Shounak Dasgupta and Jamie Freed)