(Reuters) -Australia's Westpac Banking Corp said on Monday its third-quarter net profit was largely in line with a year ago, as increased earnings from capital and hedged deposits counterbalanced rising expenses and bad loans.

Based on the company's average quarterly performance in the first half of 2024, Westpac's unaudited net profit showed a 6% increase.

Australia's central bank has held its policy steady since November, having raised the cash rate by 425 basis points to 4.35% since May 2022 to tame inflation. The increased rate allowed Westpac to generate better returns on its own invested capital.

Higher earnings from hedged deposits, those where the bank has used financial instruments to protect against interest rate fluctuations, indicates that the current interest rate environment could be working in Westpac's favor.

However, decade-high interest rates and growing cost-of-living pressures are impacting households' ability to repay loans on time, thereby increasing financial stress for Australian banks.

"The cost of living and high interest rates remain a challenge for some customers while many businesses are facing cost pressures and experiencing lower demand," Westpac said.

Despite these macro-economic conditions, Westpac said its household deposits in Australia grew by 3% on a quarterly annualised basis as it was able to attract more savings from customers.

The Sydney-based lender also reported 8% growth in Australian housing loans, underscoring its ability to navigate intense competition in the country's mortgage markets.

The country's No. 3 lender by market value said unaudited net profit was A$1.8 billion ($1.20 billion) for the three months ended June 30, compared with A$1.8 billion posted a year earlier.

The bank's net interest margin - the difference between interest earned from lending and paid for deposits - stands at 1.82% compared with 1.86% a year earlier.

($1 = 1.5006 Australian dollars)

(Reporting by Roushni Nair and Shivangi Lahiri in Bengaluru; Editing by Chris Reese and Lisa Shumaker)