The logo of the National Australia Bank is displayed in central Sydney, Australia, August 4, 2017.
The logo of the National Australia Bank is displayed in central Sydney, Australia, August 4, 2017. Reuters / DAVID GRAY

National Australia Bank met expectations for first-half cash profit on Thursday and raised its dividend by more than 20% as strong growth in loan volumes and higher fee income helped offset the impact of stiff competition on its margins.

NAB - the country's No.2 bank by market value and largest business lender - joined peer Australia and New Zealand Banking Group in forecasting benefit from rising interest rates in the country, but warned of higher costs as it chases growth against the backdrop of surging inflation.

Australia's "Big Four" banks 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 are taking a hit from competition and 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.

NAB said its agreement with Australia's financial crime regulator to address concerns around suspected serious breaches of anti-money laundering and counter-terrorism laws would cost the bank between A$80 million and A$120 million annually 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.

"The outlook has now shifted to one of higher growth, higher inflation and higher rates, prompting reconsideration of our targets to ensure we are appropriately balancing cost discipline against growth opportunities," NAB said in a statement.

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

NAB's interim dividend of 73 Australian cents per share was up from 60 cents a year earlier.

($1 = 1.3782 Australian dollars)