National Australia Bank has reported a leap in profit, backed by the rising interest rates that are driving strong returns across the country’s major financial institutions.

NAB, the second member of Australia’s big four banks to report improved margins this week, recorded cash earnings for the December quarter of $2.15bn, up by 18% compared with the average of the two previous quarters.

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The bank also recorded a jump in credit impairments – loans that might not be repaid in full – due in part to falling house prices, although this was overshadowed by its interest rate-fuelled growth. Impairments and overdue loans are still at modest levels, with the full impact of interest rate rises yet to be felt.

“The higher interest rate environment, resulting from central bank actions to curb inflation, has benefited our revenue this period,” the NAB chief executive, Ross McEwan, said.

“But this is also causing economic growth and house prices to soften and loan repayments to increase.”

NAB’s net interest margin, an indicator of profitability, rose by 12 basis points to 1.79%. Shares in NAB were slightly higher in early trading on Thursday.

The results resemble the Commonwealth Bank’s half-year record profit reported on Wednesday, which was also underpinned by the series of rapid-fire rate rises by the central bank.

In response to the rate increases, Australia’s big banks have increased lending rates at a faster pace than their deposits, their main source of funding, leading to fatter margins.

UBS said in a research note that NAB was benefiting from “revenue tailwinds from higher rates”.

The strong bank profits contrast with the growing financial pressures being felt by many households, which are grappling with rising mortgage and rent payments, and high prices for electricity and food.

There are concerns over the longer term outlook for Australia’s financial sector, should an anticipated cooling economy trigger more bad debts and stifle growth in home and business lending.

McEwan said while the changing conditions would create difficulties for some customers, strong employment conditions and healthy savings buffers mean most are well placed to manage.

“Our business is in good shape for this environment,” he said.

Australia’s unemployment rate has been hovering near half-century lows, but is forecast to rise as rising rates dampen spending and business growth.

The Reserve Bank governor, Philip Lowe, told a Senate committee on Wednesday that while rising rates were boosting bank profits in the short term, there were pitfalls.

“Over time, higher interest rates lead to the economy slowing, which makes it more difficult for banks,” Lowe said.

“So there’s kind of a ‘better now, maybe not so good later on’.”

The RBA has increased the official cash rate at nine consecutive meetings since May last year in a bid to tame inflation, with further rises flagged.