SYDNEY (Reuters) - Commonwealth Bank of Australia Ltd (CBA.AX: Quote, Profile, Research) (CBA), Australia's second-biggest lender by assets, missed estimates with a 4 percent rise in first-half earnings due to increased funding costs and higher provisions for bad debts.

CBA reiterated it had no direct exposure to subprime loans, while one of its hedge funds that had some investments in mortgage-backed securities was tracking ahead of the benchmark.

Volatility in global financial markets was expected to continue at least until the end of 2008, putting further upward pressure on domestic interest rates, the bank said on Wednesday.

The Reserve Bank of Australia last week raised interest rates to a decade high of 7 percent.

"Clearly we see the volatility continuing but how that affects our results depends on how our customers react in terms loan losses," David Craig, CBA's Chief Financial Officer told reporters.

"Funding costs will continue to be high but we have now started to pass those higher funding costs on to our customers," he added.

CBA, also Australia's top mortgage lender and the biggest retail bank, reported cash earnings of A$2.385 billion ($2.149 billion) for the six months ended December from a revised A$2.296 billion reported a year ago.

A Reuters survey of eight analysts on average forecast CBA to report a cash profit of A$2.47 billion, with estimates ranging from A$2.38-A$2.55 billion.

Cash earnings represent the core profit earned by banks and strip out unrealized profits or losses from interest and foreign exchange hedges. Cash profit also forms the basis for dividend payments.