National Australia Bank, the country's top lender by assets, on Thursday highlighted increased pressure on margins as it posted an 8.5 percent rise in cash earnings led by lower bad debt charges.
CEO Cameron Clyne, unveiling his final set of results before passing the baton to Andrew Thorburn in August, warned of tough competition and rising regulatory costs stemming from the need to maintain higher capital ratios.
NAB and its rivals Commonwealth Bank of Australia, Australia and New Zealand Banking Group and Westpac are seeing their lending margins get squeezed as competition for low-risk mortgages heats up.
Even so, Australia's "Big Four" banks are on track for a sixth year of record profits, bolstered by low interest rates which are encouraging borrowers and shrinking costs associated with bad debt provisions.
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"Earnings have generally been pretty solid. Asset quality trends are pretty good. And banks have performed as per expectations," said Rohan Walsh, investment manager at fund manager Karara Capital.
NAB said cash profit - which excludes one-offs, non-cash accounting items, investment gains or losses and is closely watched by investors - rose to a record A$3.15 billion ($2.94 billion) for the six months to March 31. That compares with analysts expectations of A$3.2 billion and A$2.9 billion a year ago.
Bad debt charges during the period fell 52 percent from a year ago to A$528 million, led by lower loan losses in its Australian banking and British businesses.
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NAB's profits and share price performance have lagged its peers due largely to its poorly performing UK operations. The bank has pared its British operations, where mounting bad debts in 2012 led to its first profit drop since 2009.
Its net interest margins fell 9 basis points to 1.94 percent, and the interim dividend rose 6 cents to 99 cents for the first half.