Nov. 13 (Bloomberg) -- Commonwealth Bank of Australia, the nation's biggest mortgage lender, said bad debts may double this year, citing lending to companies including Lehman Brothers Holdings Inc. and Allco Finance Group Ltd.

Impaired expenses will be the equivalent of as much as 0.5 percent of total lending in fiscal 2009, twice as much as the previous 12 months, with the majority taken in the first half, according to a quarterly update from the Sydney-based bank today.

Commonwealth's shares dropped 6 percent in Sydney trading to A$33, the lowest level since January 2005. The nation's biggest banks have increased provisions this year as Allco and ABC Learning Centres Ltd. collapsed, with Commonwealth in August posting the slowest earnings growth in four years.

``Commonwealth's bad debts needed to increase, given they had been somewhat light relative to the market's own view,'' said Peter Vann, who manages more than $600 million, including Commonwealth shares, at Constellation Capital Management Ltd. in Sydney. ``This probably brings them up to speed.''

Bad debts jumped to A$930 million in fiscal 2008 from A$496 million a year earlier. Bad debts as a proportion of loans increased to 0.26 percent from 0.14 percent a year ago.

``While there is no evidence of systemic credit issues, the group's exposure to Lehman Brothers, Allco Finance Group and ABC Learning Centres will result in significantly higher first-half provisions,'' Chief Executive Officer Ralph Norris said in a statement.

Lehman Debt

Commonwealth made loans worth A$150 million to Lehman, it said in September after the New York-based investment bank filed for bankruptcy.

Chairman John Schubert told shareholders at the company's annual meeting today that the slowing Australian economy is likely to avoid recession.

Australia's banking stocks have slumped in 2008 as funding costs rose for lenders and borrowers struggled to make repayments in an economy that began showing signs of slowing after 17 straight years of growth. Commonwealth shares have declined 44 percent this year.

The central bank has cut borrowing costs by 2 percentage points since early September in the most aggressive round of reductions since 1991 on concern slower global growth will erode Australia's economic expansion.

Commonwealth was among lenders that this month appointed outside managers to ABC Learning, the world's largest child-care operator that ran up A$2.2 billion in debt as it expanded in the U.S. It's owed A$240 million by ABC, in addition to the A$100 million provision the bank took in August against ABC's 4.46 million listed hybrid notes.

Centro, Babcock

Commonwealth this month also said it has loans totaling A$170 million with Allco, which has called in outside managers after saying it may default on loan repayments. Commonwealth has A$2.2 billion in exposure to troubled Australian companies, UBS AG analyst Jonathan Mott said in a Nov. 6 note.

Australian banks have investments totaling A$7.4 billion in troubled companies such as Centro and Babcock & Brown Ltd., and have posted A$3.1 billion in bad debts, according to UBS AG. Mott predicts Australia's four biggest banks will record about A$7 billion in bad debts this year.

National Australia Bank Ltd., the nation's biggest bank by assets, last week said it may adjust provisions for bad debts after it loaned A$140 million to ABC. Westpac Banking Corp., the second-biggest lender by market value, said it will review its bad debts position after lending A$200 million to Allco.

To contact the reporter for this story: Stuart Kelly in Sydney skelly22@bloomberg.net

Last Updated: November 13, 2008 00:36 EST