By Upasana Singh and Rishav Chatterjee

Australia's biggest banks are likely to report narrower profit margins in the June quarter as an unprecedented pace of interest rate hikes to curb inflation starts to weigh on the economy, while investors will be watching for signs of rising bad debt.

Commonwealth Bank of Australia, National Australia Bank, Westpac and ANZ Group, which benefited over the past year from policy tightening, now face headwinds from rising costs and unemployment, which could result in fewer new loans and more bad debt.

The Reserve Bank of Australia last week held rates steady for a second straight month at 4.1%, having raised rates by a whopping 400 basis points since May last year in the most aggressive tightening campaign in the country's modern history.

"The big thing we're watching for is any sign that rates of bad and doubtful debt are rising," Macquarie analysts said.

Banks in the country had been facing headwinds over mortgage competition in the market which has lately eased suggesting risk to earnings has diminished, Macquarie added.

Analysts at Morgan Stanley said in a note that even though competition had eased since March, the banks were expected to report a mid-single-digit margin decline in the June quarter.

CBA, the country's largest lender, will announce its full-year results on Wednesday, where it is forecast to report an 18% jump in net interest income to A$23.0 billion ($15.10 billion) and a 5.5% jump in cash profit to A$10.12 billion, according to Morgan Stanley.

Analysts at Citi expect cash profit to rise 3.5% to A$9.93 billion, while a Visible Alpha consensus estimate stands at A$10.11 billion.

"CBA may see a slowdown in profit growth in second half after a record first half-year performance, but full-year result could remain strong," said CMC Markets analyst Tina Teng.

"Most banks may maintain buy-backs and lift dividends as they are still healthy on capital ratios."

NAB, Westpac and ANZ will update the market with their third-quarter reports over the course of the month. Analysts at Morgan Stanley expect margins to decline over fiscals 2024 and 2025.

Shares of CBA have fallen 0.7% this year. NAB and WBC shares are down 7% and 6.5%, respectively, while those of ANZ have gained 6.9%. The heavyweight banking index, the S&P/ASX 200 Financials, has gained 0.4% so far this year, as of last close.

($1 = 1.5230 Australian dollars)

(Reporting by Upasana Singh and Rishav Chatterjee in Bengaluru; Editing by Anil D'Silva)