Australia's banks are set to report higher first-half profits next month but analysts expect subdued lending growth to drive more interest rate rises this year.

Combined profits of the four major banks are expected to be around 12.6 billion Australian dollars (US$13.05 billion), according to a note by Macquarie Group analyst Michael Wiblin released Thursday, beating the A$12 billion reaped in the first half of 2011.

Westpac Banking Corp. (WBC.AU) is expected to report a cash profit of A$3.198 billion, up 0.9% from a year earlier. Australia and New Zealand Banking Group Ltd. (ANZ.AU) is expected to post a 5.2% rise in cash profit to A$2.694 billion and National Australia Bank Ltd. (NAB.AU) a 4% increase to A$2.776 billion, he said.

In February, Commonwealth Bank of Australia (CBA.AU), Australia's biggest bank by market capitalization, beat analyst expectations to report a 19% rise in net profit for the six months to Dec. 31 to A$3.62 billion, up from A$3.05 billion a year earlier.

Macquarie's forecasts echo similar predicts from JP Morgan analysts earlier this month and reflect a broad consensus among commentators that Australia's big four banks have managed to stay profitable in recent months, despite higher funding costs and slowing domestic credit growth.

Yet Wiblin noted that the "outlook for the sector remains subdued" and predicted that the banks would raise their interest rates again independently from the Reserve Bank of Australia to compensate for weak mortgage demand, thereby increasing "the risks to softer loan growth."

Earlier this month ANZ, for the second time this year, raised its home loan rates independently of the RBA. The other big four banks haven't yet followed suit but analysts expect more rate rises by the middle of the year.

UBS analyst Jonathan Mott said in another note to clients that the changing environment pointed to a fundamental shift in the profile of Australia's banks.

"The banks [will] revert to low growth, profitable companies producing strong dividends," he said. "This should continue so long as Australia can achieve an 'orderly' deleveraging process."

-By Caroline Henshaw, Dow Jones Newswires; 61-2-8272-4680; caroline.henshaw@dowjones.com
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