(Adds details, comments)
* H2 underlying profit A$3.04 bln vs A$2.95 bln consensus
* Core tier I Capital at 10 pct
* Final dividend of 79 cents/share
* Says operating environment tough
SYDNEY, Oct 25 (Reuters) - Australia and New Zealand Banking Corp said second-half underlying profit rose 7.4 percent, beating expectations on tighter costs and Asian expansion and taking full-year earnings to a record for a third-straight year.
Australia, among the few developed countries to avoid a recession during the global financial crisis, is coming under pressure from slowing Chinese growth. That is weighing on the mining sector that has largely shielded the economy from weakness afflicting Europe and the United States.
Australia's "Big Four" banks -- ANZ, National Australia Bank , Commonwealth Bank of Australia and Westpac Banking Corp -- are still expected to post a combined profit of more than $25 billion in 2011/12, marking a third straight year of record profits.
But profit growth has slipped to a three-year low due to weak loan demand, while bad debts are set to rise as the economy cools.
ANZ, which wants to earn a nearly a third of its annual profit in Asia by 2017 as growth in Australia slows, reported underlying second-half profit of A$3.04 billion ($3.14 billion), compared with A$2.83 billion a year ago and A$2.95 billion expected by analysts.
Full-year underlying profit, which excludes one-offs, non-cash accounting items and investment gains or losses, was a record A$6.01 billion.
"The results demonstrate continued progress with our super regional strategy while also adapting ANZ to the lower growth environment where tight management of costs and capital is increasingly important," Chief Executive Michael Smith, the architect behind the bank's Asian strategy, said in a statement.
"While we have continued to invest in our strategy, the increasing focus on productivity has delivered lower cost growth, particularly in the second half where the cost-to-income ratio fell 110 basis points to 45.1 percent."
ANZ said second-half bad debt provisions on an underlying basis rose to A$686 million from A$551 million a year ago.
Bad debts provisions are set to rise for Australian banks after three years of sharp falls. Last week larger rival National Australia Bank, which reports earnings on Oct 31, flagged higher provisions. No.3 lender Westpac Banking Corp reports on Nov 5, while Commonwealth Bank of Australia updates markets on its first quarter on Nov 7.
Net interest margin, a key measure of core bank profits, slipped 3 basis points excluding its global markets division.
Core tier I capital, which measures a bank's ability to absorb unforeseen losses, stood at 10 percent, up 55 basis points. Core Tier I Loans under the Australian regulator's stricter guidelines stood at 8 percent and above the minimum requirement.
ANZ said lending grew 8 percent while deposits grew 12 percent, indicating Australians' penchant for savings in turbulent times.
For the broader industry, bank lending is trickling up at an annual rate of about 4 percent now compared with an historic average of over 10 percent as Australians save more.
The bank announced a dividend of 79 Australian cents per share.
ANZ shares have risen about a quarter so far this year, making it the second-best performer among Australia's big four banks. The broader market has climbed 11 percent.
$1 = 0.9676 Australian dollars Reporting by Narayanan Somasundaram; Editing by Richard Pullin and John Mair