Aug. 31 (Bloomberg) -- Australia & New Zealand Banking Group Ltd. said profit in the 10 months ended July climbed from the same period a year earlier after lending grew and bad debts were lower than internal estimates.

Underlying profit after tax was “slightly above” last year’s figure, Australia’s fourth-biggest bank said today in a statement, without giving a comparable total. Provisions for loan defaults slowed in every unit and country apart from New Zealand, the bank said. The stock climbed to a 15-month high.

“The 2009 year will be the peak of bad debts for all the Australian banks,” said Tom Quarmby, an analyst at Macquarie Group Ltd. with a “neutral” rating on ANZ. “It looks like the bottom or the worst point may be sooner and shallower.”

ANZ and local rivals such as Westpac Banking Corp. have avoided the magnitude of losses suffered by European and U.S. lenders as the Australian economy skirted recession. Chief Executive Officer Michael Smith, who today said bad debts are leveling out, bolstered the bank’s balance sheet with A$4.7 billion from stock sales since May and ANZ’s first dividend cut since the 1991 recession.

Melbourne-based ANZ’s shares rose 4.1 percent to A$21.29, the highest since May 30, 2008, at the close in Sydney trading. ANZ has climbed 39 percent this year, almost double the 20 percent gain by the benchmark S&P/ASX 200 index.

New Zealand

Net loans and advances increased 3 percent in the 10-month period, ANZ said. Provisions are “trending slightly better than expectations,” the bank said. Still, the company reiterated a forecast that charges will rise about 20 percent from the first half’s A$1.44 billion.

“In Australia and Asia, the economies are showing early positive signs of recovery, and although the cycle is still playing out, there are reasons for cautious optimism,” Smith said in the statement. “In New Zealand, economic conditions remain difficult with the economic recovery likely to be much slower.”

Australian bank lending rose 3 percent in July from a year earlier, the Reserve Bank of Australia said today.

In New Zealand, ANZ National Bank reported a 43 percent slump in net income to NZ$478 million ($327 million) in the nine months ended June. Full-year bad-debt provisions will probably triple, the bank said in a statement.

‘Encouraging Signs’

Fiscal-year net income at ANZ will fall 9.6 percent to A$3 billion, the second straight annual decline, according to the mean of eight analysts’ estimates compiled by Bloomberg. Earnings growth will resume in the 12 months ending September 2010, the estimates show.

Westpac, Australia’s largest lender, said on Aug. 21 that cash earnings in the three months ended June 30 were about A$1.1 billion, matching the figure a year earlier. Westpac CEO Gail Kelly said the pace of defaults to date wasn’t likely to be repeated in the next few months. She said there were “encouraging signs of improvement.”

Commonwealth Bank of Australia, the second-biggest lender, said Aug. 12 that profit fell 11 percent in the second half ended June 30 as business loans soured and earnings at its wealth management unit declined.

ANZ this month agreed to buy Royal Bank of Scotland Group Plc’s units in six Asian countries as earnings growth slows at home. Even before the RBS deal, ANZ had more investments in Asia than its Australian rivals, including stakes in Shanghai Rural Commercial Bank, Saigon Securities Inc. and Malaysia’s AMMB Holdings Bhd.

‘Tactical Advantage’

Smith, who previously headed HSBC Holdings Plc’s Asian division, is aiming to double the proportion of income ANZ derives from Asia to 20 percent. He said today on a conference call that the bank is “looking at a number of opportunities,” and analysts have said ANZ’s balance sheet is strong enough to digest more takeovers.

ANZ said its Tier 1 capital ratio, a measure of financial strength, was 10.2 percent at the end of June, the highest among the nation’s four biggest lenders and above the bank’s internal goal of 7.5 percent to 8 percent.

Such a ratio means the bank has more “firepower” before slipping below its own targeted capital ratio range, according to an Aug. 28 report by Matthew Davison, an analyst at Merrill Lynch & Co.

That situation can’t be sustained indefinitely because it’s not the most efficient use of funds and risks eroding ANZ’s return on equity, said James Ellis, an analyst at Credit Suisse Group AG.

It’s a “tactical advantage” when bidding for assets around Asia because there’s less need to tap capital markets or shareholders to fund acquisitions, said Ellis. The bank has “substantial funds” ready for acquisitions, he said.

ANZ’s profit fell 28 percent to A$1.42 billion in the six months ended March 31 from a year earlier as credit impairment charges almost doubled.

To contact the reporter on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net

Last Updated: August 31, 2009 02:57 EDT