BENGALURU/SYDNEY (May 5): National Australia Bank Ltd (NAB) increased its dividend as a surge in home and business loans helped lift first-half (1H) profit but the country's No 2 lender bumped up its cost estimates, citing rising inflation and a settlement with regulators.

NAB, Australia's biggest business lender, joined smaller Australia and New Zealand Banking Group Ltd in saying that while costs would increase, its margins would benefit after the country's central bank hiked rates for the first time in more than a decade.

Australia's "Big Four" banks have enjoyed a boom in home lending amid record-low rates and a pandemic-fuelled shift to remote working that buoyed property markets. But their margins have been hit by competition and by borrowers moving to fixed-rate loans.

NAB's net interest margin declined by 11 basis points to 1.63% in the six months to March.

The Melbourne-based company said a previously disclosed agreement with Australia's financial crime regulator to fix shortcomings in anti-money-laundering compliance would cost up to A$120 million a year through fiscal 2024.

That, along with a spree of hiring bankers and broader inflation, prompted the bank to raise its annual cost estimate to about 2%-3% from broadly flat earlier, and abandon its target to lower absolute costs in the next three years.

"We are entering a new phase of interest rates increasing," chief executive officer Ross McEwen said on a call with journalists. "It's going to be a different experience, and it's coming at a time when our customers are experiencing other increases as well," he added.

But he expected home borrowing would remain strong given the country's low unemployment rate. He said Australians now face higher fuel and energy costs, but "the biggest feature for customers is 'have I got a job?' My assessment is it will be absorbed."

NAB reported cash earnings of A$3.48 billion (US$2.53 billion), compared with A$3.34 billion a year earlier and Refinitiv IBES estimates of A$3.48 billion.

The company declared an interim dividend of 73 Australian cents per share, or A$2.35 billion, compared with 60 cents a year earlier.

NAB shares were down 1% in mid-session trading, against a higher overall market, as analysts welcomed the result but weighed the impact of rising costs.

"While costs will be higher, we believe the market will continue to view NAB favourably," said Barrenjoey analysts in a note.