UPDATE 2-Australia's NAB earnings slide, sees poorer asset quality, higher costs

(Adds CEO comments, detail on cost)

SYDNEY/BENGALURU, Nov 5 (Reuters) - National Australia Bank on Thursday posted a 36.6% fall in annual profit, hurt by higher loan loss provisions for the COVID-19 pandemic, customer and payroll remediation, and higher wages.

Australia’s third largest lender also warned costs would keep rising in the next few years, and asset quality would deteriorate in the pandemic-stressed economy.

NAB reported full-year cash earnings of A$3.71 billion ($2.66 billion), compared with a restated figure of A$5.85 billion last year. Analysts polled by Reuters on average expected cash earnings of A$3.82 billion.

Lenders worldwide have been severely hit as record low interest rates aimed at boosting economic growth have hurt margins. Loan repayment holidays and increased defaults have added to troubles.

Australia’s COVID-19 infection rate is among the lowest in developed economies, thanks to the quick closing of its international borders, strict movement restrictions and widespread testing.

“While the outlook remains uncertain, I am optimistic for Australia and New Zealand,” said Ross McEwan, chief executive of NAB, the largest business lender in both countries.

“Economic activity will continue to improve with the benefit of containment measures and the reopening of business.”

NAB said it had booked A$1.86 billion in additional forward looking collective provisions in fiscal 2020, as it expects asset quality to deteriorate further.

Expenses rose 10% in the year to September 2020, and NAB forecast another 2% increase in fiscal 2021, excluding notable items such as remediation costs. Subdued demand for credit would prevail until confidence returns, it said.

The lender also said likely sustained low interest rates would reduce the group’s net interest margin by about 6 basis points in fiscal 2021.

NAB’s results took an added hit from provisions for customer remediation for previous improper advice by its wealth management unit, MLC Wealth, which it agreed to sell to IOOF Holdings earlier this year.

The company declared a final dividend of A$0.30, equivalent to 49% of statutory profit, in line with regulatory guidance.

$1 = 1.3937 Australian dollars Reporting by Paulina Duran in Sydney and Rashmi Ashok in Bengaluru; Editing by Vinay Dwivedi and Richard Chang