(Reuters) -National Australia Bank posted an 8% drop in its third-quarter cash earnings on Friday, pressured by lower revenue and higher operating expenses, and flagged a further decline in its asset quality.

Sustained high costs of living have eroded households' disposable incomes and ability to meet loan payments, resulting in rising arrears for banks.

"The economic environment, including persistent inflationary pressures, is challenging for our customers," NAB CEO Andrew Irvine said in a statement.

"While most customers are proving resilient, not unexpectedly we have seen asset quality deteriorate further in 3Q24."

NAB's ratio of non-performing exposures to gross loans was 1.31% at June-end, up 11 basis points from March. The ratio was the highest since at least September 2021.

This reflected a broad-based deterioration in the business lending portfolio and higher arrears for the Australian mortgage portfolio, according to NAB.

NAB, the country's top business lender, posted unaudited cash earnings of A$1.75 billion ($1.16 billion) for the quarter ended June 30, compared with A$1.90 billion a year earlier.

Revenue slipped 1% compared with average of prior two quarters, while expenses increased 1% due to higher salary-related costs.

Credit impairment charge was A$118 million, lower than consensus expectations of A$220 million, according to Citi.

"While revenue missed consensus expectations, given that the overall trend does not look inconsistent with peer trends, combined with well managed costs, we think it may soften the share price impact," Citi analysts wrote.

Shares of NAB rose 1.3% by 0026 GMT, while the broader market was up 1.3% in broad-based buying.

Net interest margin, a key measure of profitability, was stable, with small reductions from lending competition and deposit mix offset by benefits of higher interest rates.

The common equity tier 1 ratio - a measure of spare cash - was 12.6% at the end of the third quarter.

($1 = 1.5131 Australian dollars)

(Reporting by Himanshi Akhand and Rishav Chatterjee in Bengaluru; Editing by Mohammed Safi Shamsi and Subhranshu Sahu)