* Annual cash profit up 12 pct to A$8.7 bln, in line with f'casts
* Profit bolstered by strong mortgage credit growth, low bad debts
* Full-year dividend hiked 10 pct
* Earnings expected to rise 4-5 pct a year -Morningstar (Recasts on outlook, adds analysts' comments)
By Swati Pandey
SYDNEY, Aug 13 (Reuters) - Commonwealth Bank of Australia (CBA), the country's top lender by market value, booked a fifth straight year of record earnings and is set to notch up more profit growth as low interest rates encourage both households and companies to borrow.
Australian banks' strong focus on mortage lending, tight cost controls and very low levels of bad debt as well as hefty dividend payouts have made the sector a favourite of investors, commanding much higher valuations compared to peers.
Economic growth, in tandem with low interest rates, will continue to lift industry earnings although many analysts say finding further upside for shares that are trading not too far of record peaks could be difficult.
"Commonwealth Bank and all banks are tightly managing their costs so their revenue growth is exceeding the rate of cost growth - so the core earnings are growing at a moderate pace," said Morningstar analyst David Ellis.
"We don't expect much further improvement in bad debts but banks can still generate profit growth so long as the economy continues to grow," he said, adding that CBA's earnings are expected to increase around 4 percent to 5 percent per year over next few years.
CBA's full-year cash profit, which excludes one-off items, jumped to A$8.7 billion ($8 billion) in the year to June 30, in line with expectations. It declared a final dividend of A$2.18 per share, taking its full-year dividend payout to A$4.01 a share, a 10 percent rise.
CBA said in a statement it was "cautiously positive" about the outlook for 2015 financial year with business and consumer confidence remaining fragile.
Australia's economy is expected to grow around 3 percent in 2014 and 2015, according to a Reuters poll. The central bank has held interest rates at record lows of 2.5 percent for an entire year to support the economy as a long boom in mining investment fades.
Recent data showed a measure of Australian consumer sentiment rose strongly in August as households grew more optimistic on the near-term economic outlook and fretted less about their finances.
CBA, the country's biggest mortgage lender, said home lending grew 6.7 percent compared to the industry average of 6.2 percent. Net interest margin - a core measure of profitability - rose 1 basis point to 2.14 percent during the year.
In the absence of any major surprises, CBA shares were down 0.8 percent in afternoon trade. They are up 5 percent for the year to date, compared with a 3.3 percent rise in the benchmark S&P/ASX 200 index.
CBA's shares have a forward price-to-earnings ratio of 14.6 times, compared to an average of 12.6 times for Australia's other three banks and an average of 8.1 times for the global banking industry.
CBA, which is the first of the major banks to report full year results, follows a different financial year from its other three peers. Australia and New Zealand Banking Group Ltd , Westpac Banking Corp and National Australia Bank Ltd are all due to report third-quarter earnings later this month. (Additional reporting by Patturaja Murugaboopathy in Bangalore; Editing by Kenneth Maxwell and Edwina Gibbs)