A seven per cent fall in earnings for ANZ's Australian division was driven by a 13 basis point decline in its net interest margin, which fell from 2.58 per cent in September to 2.45 per cent in the March 2012 half.The Australian retail and business banking arm reported a profit of A$1.34 billion for the half, or less than half the total profit of the group.This margin decline was a result of pricing pressure on retail and commercial deposits, and higher wholesale funding costs.The bank has made two out-of-cycle mortgage rate increases this year, but it said cost pressures "more than offset" asset re-pricing.The cost of deposits, relative to the cash rate, went up 28 basis points during the half. The cost of wholesale term funding, relative to the cash rate, went up 15 basis points.Smith said the business was "well positioned to take advantage of some of the tasks that we've set ourselves and have been done in this half… that will flow through into the second half", including "the different pricing mechanism" for home loans."It's going to be much easier, I think, to manage our margin more effectively," he said.The other factor in what ANZ chief executive Mike Smith called a "subdued performance" for the division that produces 46 per cent of group earnings was weak demand for credit.ANZ actually performed strongly in the mortgage market, with a five per cent increase in its home loan portfolio during the six months to March - about twice the rate of system growth.Smith said the bank "pressed the throttle a bit too hard" on home loans and did not intend to keep growing its mortgage book at this rate. Its long-term aim is to keep pace with or be slightly ahead of system growth.The commercial loan book grew three per cent over the six months to March - also ahead of system growth. The head of the Australian business, Phil Chronican, said ANZ was looking to grow share in the business market.Among the Australian business units, retail banking's profit was down five per cent from the previous corresponding period, commercial banking's was up 20 per cent and wealth's was down 18 per cent.Smith described the wealth business as "weak" and foreshadowed a major overhaul of the business that would be announced later this year.