National Australia Bank's first-quarter profit slipped 1 per cent to $1.6 billion, as staff pay rises and redundancy costs ate into the bank's earnings growth.
In a trading update on Monday, NAB said its cash profit for the December quarter was about 1 per cent lower than the same three months last year, and 1 per cent lower than the September quarter.
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NAB admits security breach
The bank says human error was to blame when it sent details of 65,000 customers to the wrong email address in December.
Revenue increased 1 per cent, it said, but expenses grew much faster, at 5 per cent, amid higher staffing costs. NAB said the lift in staffing costs was mainly because of a new enterprise agreement that came into effect in October, and redundancy payments to staff whose jobs had been cut.
Its net interest margin - which compares funding costs with what banks charge for loans and is a key influence on profits – was "broadly stable".
But NAB repeated that its funding costs remained "elevated", although it has passed on some of this cost to borrowers by increasing interest rates for property investors by 0.15 percentage points in December.
The earnings update is the first from a major Australian bank in 2017, and suggests the soft revenue conditions continued late last year.
NAB's charge for bad and doubtful debts fell 23 per cent to $164 million, but this was mainly because it last year topped up its provisions for mining and agricultural loans.
In a sign of some slide in credit quality, the proportion of loans that were more than 90 days in arrears edged up from 0.85 per cent to 0.9 per cent.
NAB chief executive Andrew Thorburn emphasised the bank was keeping a tight rein on costs, revealing it had cut full-time staff numbers by 488 people in the quarter.
"Our first-quarter expenses were impacted by the usual 1 October salary increases as well as elevated redundancy costs," Mr Thorburn said.
Redundancies spiked in the quarter because the bank completed several major projects, including the sale of its life insurance arm to Japan's Nippon Life, and a revamp of its technology system used by frontline bankers.
The bank continued to target faster revenue growth than cost growth, Mr Thorburn said, and was on track to deliver $200 million in "productivity savings" over the full year.
"We are well advanced on a number of initiatives that give us confidence about second-half productivity and cost benefits."
Senior analyst at Regal Funds Management, Omkar Joshi, said it was positive that net interest margins had stabilised, but the quarterly result was "soft". Mr Joshi said some in the market expecting bank profit margins would widen in 2017 might be overly optimistic.
Banks' profit margins have been crunched by falling interest rates, which they struggle to pass on to deposit customers, and stiff competition in recent years. Mr Thorburn's commentary suggested these trends were continuing.
"While the Australian and New Zealand economies remain resilient and continue to deliver solid growth, the operating environment has some challenges with funding costs remaining elevated and competition still intense," Mr Thorburn said.
NAB's tier one capital was 9.5 per cent of its assets, down from 9.8 per cent at the full-year results because of its dividend payment.
It was considering issuing a new ASX-listed hybrid debt security to maintain its capital position, the bank said, subject to market conditions.