By Roushni Nair

National Australia Bank on Thursday reported a rise in annual cash profit as it benefited from higher interest rates, but cautioned elevated competition and inflationary pressures that crimped second-half earnings by 10% would persist.

The country's second-largest lender reported stronger annual earnings on deposits and capital against the backdrop of higher interest rates, which has allowed Australian lenders to widen their margins and capitalise on higher borrowing costs.

But for the half-year ended Sept. 30, cash earnings sank as the impact of monetary policy tightening and inflationary pressures crippled households and the economy.

"This has seen our financial results soften in 2H23 compared with 1H23," NAB CEO Ross McEwan said in a statement. "While the economic transition has further to go, we are well placed to navigate this environment."

NAB's net interest margin, a key metric of profitability, shrank to 1.71% as of Sept. 30, from 1.77% seen at March-end.

The lender's full-year cash profit of A$7.73 billion ($4.95 billion) for the year ended Sept. 30 was up 8.8% from a year earlier and marginally lower than consensus estimates of A$7.80 billion.

The annual performance of its business and institutional banking divisions stood out with of 10.1% and 14.9% in cash profits respectively, while the personal banking division was a drag on its results, posting a 9.1% decline in cash earnings to A$1.45 billion.

The bank reported a jump in its credit impairment charge for the year to A$802 million, up from just A$125 million a year ago, which it said reflected volume growth and worsening asset quality.

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

($1 = 1.5620 Australian dollars)

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