A high interest rate environment has benefited Australian banks, but they now face headwinds from rising bad debt and increasing competition for mortgages. Last week, the country's biggest lender Commonwealth Bank of Australia posted record annual profit on the back of rising interest rates, but warned higher living costs were pushing up debt arrears and competition was squeezing margins. NAB's net interest margin - a key measure of profitability - slipped to 1.72% in the April-June quarter from 1.77% as at March 31.