* NAB H1 profit A$3.15 bln vs A$3.2 bln estimate
* Net interest margins squeezed across the board
* Rising mortgage competition, regulatory costs
* House price gains could be credit negative for banks - Moody's (Recasts with margins, housing market, adds quotes, analysis)
By Swati Pandey
SYDNEY, May 8 Lending margins at Australia's "Big Four" banks are headed for all-time lows, throttled by competition for a share of the fast-growing housing market and as cash-rich corporates rein in bank borrowing amid a sluggish economy.
National Australia Bank, the country's top lender by assets, joined its rivals in reporting narrowing net interest margins (NIM) on Thursday, as it posted an 8.5 percent rise in first-half cash earnings.
After emerging from the global financial crisis relatively unscathed, Australian banks have turned to mortgages and consumer businesses to generate about 35 to 40 percent of their earnings.
The strategy has paid off, and the Australian banks now have better quality of earnings, generating on average 11.6 percent return on equity compared with about 8.7 percent ROE earned by Standard Chartered plc and HSBC Holdings, according to Thomson Reuters data.
But their success has attracted new players. Last year, investment bank Macquarie Group forayed into the mortgage business while new, smaller lenders are also threatening to disrupt the highly profitable segment.
NIMs for Australia's Big Four - NAB, Commonwealth Bank of Australia, Australia and New Zealand Banking Group and Westpac Banking Group - shrank 5 basis points to 2.08 percent in the six months to March 31, according to a biannual analysis by PwC.
Margins are close to the all-time low of 2.05 percent set in 2008, PwC Australia's financial services leader Hugh Harley said on Thursday after NAB rounded off the Big Four's half-yearly reporting season with yet another record profit.
Further falls to current margin levels are "likely as banks increase competition for business," he added.
Ratings agency Moody's Investor Service also sounded a word of caution, warning that a sharp jump in house prices fuelled by historically low interest rates could become a credit negative for Australian banks over the next 12 months.
"Australian house prices have been rising rapidly in recent quarters, raising concerns with regard to their sustainability and the possible negative impact on the quality of Australian banks' residential mortgage portfolios," Ilya Serov, a Moody's vice president and senior credit officer.
Even so, Australia's major banks are on track for a sixth year of record profits, bolstered by their burgeoning mortgage books and shrinking costs associated with bad debt provisions.
Higher mortgage lending and lower bad debt charges helped NAB post a record cash profit of 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.
"If business credit growth comes back that is going to be a big thing," NAB CEO Cameron Clyne told analysts at a post-earnings briefing. "What we are seeing at the moment is business confidence but it has to translate into activity," he added.
Australia's economy is expected to slowly gather speed over the next couple of years as strength in housing and exports works to offset the drag from a maturing mining boom.
Business credit is showing signs of a gradual uptick after a year of flat growth. It rose at an annual pace of 4.4 percent in three months to February, higher than 1.9 percent in the year to November.
Clyne, unveiling his final set of results before passing the baton to Andrew Thorburn in August, also warned of rising regulatory costs stemming from the need to maintain higher capital ratios.
Earlier this week, Australia's well-capitalised banks said their capital ratios may take a hit after the banking regulator advised them it was considering withdrawing some benefits they get from issuing debt by their wealth management arms. ($1 = 1.0713 Australian Dollars) (Reporting by Swati Pandey; Editing by Stephen Coates)