* NAB Q3 cash profit falls 3 pct
* Credit impairment costs rose 9 pct, expenses up 2 pct
* In wake of banking inquiry, NAB warns of more provisions
(Adds ANZ credit quality results)
By Paulina Duran
SYDNEY, Aug 14 (Reuters) - National Australia Bank NAB.AX booked a fall in third-quarter profit on a jump in impairment charges and warned of higher costs to come, as it grapples with the fallout from a powerful inquiry into misconduct in the country's financial sector.
The results come after a bruising week for Australia's No. 4 lender at the country's Royal Commission during which the inquiry heard that the bank charged clients for services not rendered, and played down the issue to the corporate regulator to avoid adverse publicity. Melbourne-based bank said unaudited cash earnings fell 3 percent to A$1.65 billion ($1.2 billion) for the three months ended June 30.
The figure, which excludes one-offs and non-cash accounting items, was marginally better than an estimate of A$1.6 billion result predicted by Morgan Stanley (NYSE:MS) analysts, helping lift NAB's shares 1.5 percent.
"As we make progress towards resolving several previously disclosed regulatory compliance investigations, we expect to recognise additional provisions in the 2H18 result," Chief Executive Andrew Thorburn said in a statement, without elaborating.
Goldman Sachs (NYSE:GS) analysts voiced disappointment that the bank did not adequately provision for regulatory costs earlier.
"We are disappointed that NAB did not cater for a larger regulatory/compliance spend buffer in its prior FY18/medium term cost guidance given there was already fast building momentum on this theme," they wrote in a note on Tuesday.
NAB also said expenses, which include compliance costs, rose 2 percent, and that it would keep expense growth for the second half at between 5 to 8 percent.
"The danger is when full-year earnings come out, expenses could be a lot higher when you add the Royal Commission on top of the underlying expense growth," said Hugh Dive, chief investment officer at Atlas Funds Management.
"That's the concern today."
Documents submitted to the Royal Commission show the corporate regulator is investigating whether to impose criminal penalties over NAB's charging of customers for financial advice they did not receive. has said he doesn't believe NAB is guilty of "criminal acts" and has apologised for failing to serve customers "with honour".
The bank did not elaborate in Tuesday's trading statement what other provisions might be booked during the remaining part of the financial year. Other regulatory problems have included NAB's admission in November that its employees attempted to rig a key interest rate, to settle a lawsuit brought by securities regulator. IMPAIRMENT
NAB's credit impairment charges for the quarter rose 9 percent from a year earlier, driven by a A$25 million provision for possible loan losses in the future.
The four largest banks, which together control about 80 percent of the country's home loan markets, have boosted profits on the back of low bad debt charges in recent years.
Credit ratings agencies have, however, warned the tide is turning as borrowers, hit by the rising costs of living, struggle to cover payments on principal in addition to interest for a record amount of home loans taken out in 2014-2015 that become due soon.
CLSA banking analyst Brian Johnson said that NAB's results indicated that there was some stress in the home loan market but "it's not quite as big as people have expected."
Analysts also noted that NAB has a large portfolio of loans to small businesses, which tend to be riskier than home mortgages, and that could account for some of the jump in provisions.
In contrast to NAB, Australia and New Zealand Banking Group ANZ.AX said on Tuesday that charges for impaired assets in the third quarter fell to their lowest level since 2014, as it did not need to make complete use of provisions set aside previously. also reported revenue growth halved to 1 percent from the same quarter a year earlier, while the bank's net interest margin shrunk due to a higher cost of borrowing money and strong competition between home lenders.
Last week, the country's biggest lender, Commonwealth Bank of Australia CBA.AX , posted a drop in annual profits, the first in almost a decade. = 1.3753 Australian dollars)