SYDNEY (AFP) -- Australia's largest retail bank, Commonwealth, expects borrowing costs to rise in Australia because of the U.S. subprime mortgage crisis, chief executive Ralph Norris said Wednesday.

He was speaking after the bank reported an 18 percent rise in annual net profit to a record 4.6 billion dollars (3.8 billion U.S.) on the back of a strong economy which encouraged Australians to borrow more.
""The fact of the matter is the price of credit in the market internationally has moved, so there will, at some stage, be some increase in rates,"" Norris said.
Non-bank lenders, which source part of their funding in offshore markets including the U.S. debt market, will be harder hit than major banks including Commonwealth which use large retail deposit bases to fund lending, he said.
""Obviously, there is a widening of margins in view of risk right across the board -- for non-bank lenders it is going to be more accentuated because of their lending profiles,"" Norris said.
On Tuesday, newly-listed Rams Home Loans Group Ltd, warned that its earnings would be adversely impacted by rising credit costs, particularly in the U.S. which is a key source of funds for the group.
""What you are seeing overall is an increase in credit spreads based on risks so where there is higher risk there is going to be an increase in margin,"" Norris said.
Instability in credit markets may persist for some time but it was difficult to predict exactly how long, he said.
Commonwealth Bank and other major Australian banks were, to a degree, protected from the widening credit crunch because of the conservative lending policies