Bendigo and Adelaide Bank expects increased mortgage rates to lift performance over the next six months after first half profit dipped 8.2 per cent due to "unsustainable" competition by rivals.
Shares in the regional lender dropped more than four per cent in a positive market after Monday's announcement that net profit for the six months to December 31 fell to $208.7 million, from $227.3 million a year earlier.
Net interest margin - the profit a bank makes on loans - contracted by eight basis points to 2.16 per cent following fierce competition in the lead up to November's out-of-cycle home loan rate hikes by lenders.
"There was in our view some unsustainable pricing ... there were some players who decided they would use price to hoover up the market and then think about adjusting those issues down the track," managing director Mike Hirst told analysts.
"You'll see us returning to systems or above systems growth, which is typically where we've been until that uneven playing field became exacerbated."
The big four banks raised their standard variable rates for owner occupiers by 15-20 basis points in November as part of their response to increased capital requirements.
This allowed Bendigo to raise its rate by 0.12 percentage points, which the bank hopes will benefit margins over the second half.
Mr Hirst said more customers also took advantage of low rates to overpay their home loans, reducing interest payments to the bank.
About 43 per cent of Bendigo's customers are ahead in their loan repayments, while mortgage offset accounts increased by 12 per cent over the period.
About 81 per cent of the bank's funding is now provided by retail customers.
"All of this means that the bank is in a very strong position from a balance sheet perspective and particularly well placed to compete vigorously for customers in the future," Mr Hirst said.
First half cash earnings - the banks' preferred measure of profitability - rose 2.7 per cent to $223.7 million.
Bendigo shares were down 37 cents, or 4.0 per cent, at $8.86.
HOME LOAN RIVALS EAT INTO BENDIGO'S PROFIT
* Cash earnings up 2.7pct to $223.7m
* Net profit down 8.2pct to $208.7m
* Interim dividend up one cent to 34 cents, fully franked
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