UPDATE 2-ANZ Q3 strong on Asia growth, shares rise to 16-month high

* Q3 underlying profit A$1.53 bln vs A$1.5 bln expected by analysts

* Shares up 2 pct to 16-month high

* International, institutional business see strong growth

* Group margins stable (Adds analyst comments, shares)

By Narayanan Somasundaram

SYDNEY, Aug 17 (Reuters) - Australia and New Zealand Banking Group posted a third-quarter profit rise on the back of cost cuts and benefits from expanding in Asia, setting it up for a third straight year of record earnings and sending its shares to a 16-month high.

ANZ's results, which were better than those of larger rivals that reported flat earnings, show its Asia growth plans are slowly bearing fruit. Australian banks need new growth avenues to protect record profits as demand for loans in their home market has slipped to the lowest level in four decades.

Led by former HSBC Asia head Michael Smith, ANZ has invested $9 billion of its capital in Asia.

The smallest of the big four Australian lenders is attempting to model itself on HSBC and Standard Chartered and aims to double contribution from Asian business to up to 30 percent of group profits by 2017.

ANZ posted third-quarter underlying profit of A$1.53 billion ($1.61 billion) based on Reuters' calculations, up 9 percent from A$1.4 billion a year ago and compared with the A$1.5 billion expected by analysts.

Underlying profit excludes one-offs, non-cash accounting items and investment gains or losses.

"The positive for ANZ is the cost control. Broadly for the industry, the results reaffirm positive trends for domestic consumer business with margins improving and asset quality benign. This should clearly favour Westpac," said James Ellis, an analyst at Credit Suisse.

ANZ shares were 2 percent higher on Friday at A$24.38 and Westpac Banking Corp was up 1.3 percent. National Australia Bank and Commonwealth bank of Australia , the other two major banks in the nation, were up 0.9 percent and 0.5 percent, respectively.

ASIAN GROWTH

Australian banks are not required to provide full financial disclosures in their quarterly updates as they are mandatory only in their half- and full-year reports.

ANZ's first-half results were lifted by its offshore operations mainly from Asia, where it is building out its cash management, trade finance and wealth management businesses.

"We continue to see growth opportunities in the business from ongoing good performance in international and institutional banking," Smith said in a statement.

The bank has rolled out a new transaction banking platform in Asia and has 100 customers already on it, with analysts predicting strong growth for ANZ in the segment.

"ANZ demonstrated in the last half a growing contribution from its Asia business and this appears to have continued in the third quarter," Credit Suisse's Ellis said.

ANZ said group margins, a measure of core profitability, was broadly stable and it expected costs rises to match revenue growth for the year.

It has frozen the salary of its top executives and announced 1,000 jobs would be cut this year as part of plan to protect profits.

The bank said core tier I capital, a measure of the bank's ability to absorb losses, under the local regulators BASEL III implementation plan was 7.8 percent, unchanged from the first half. ($1 = 0.9520 Australian dollars) (Editing by Muralikumar Anantharaman)