Sept. 30 (Bloomberg) -- Commonwealth Bank of Australia Chief Executive Officer Ralph Norris said he is cautious about the nation’s economic outlook because of risks posed by instability overseas.

“The Australian economy is in pretty good shape, but I am still very much concerned about the global issues, particularly around the U.S. and the U.K.,” Norris said at a business lunch in Sydney today. “It’s hard, at this stage, to see real improvement in the fundamentals of those economies. I’m cautious that we don’t see further bumps in the road from those economies that have an impact on our economy.”

Norris said he’ll need at least another six months before being able to determine whether Commonwealth Bank can write back some of its provisions for bad debts or consider returning funds to shareholders. He’s “comfortable” with the bank’s capital ratio, he told journalists after the lunch.

Australian banks are weathering the global recession as higher earnings from lending to home buyers offset rising bad debts, the central bank said last week. The nation’s four- largest banks, including Westpac Banking Corp. and National Australia Bank Ltd., posted combined after-tax profits of A$8.6 billion ($7.6 billion) in the latest half year, the report said.

Commonwealth Bank shares surged 79 percent in Sydney trading this year, the biggest advance among the four biggest banks, and almost triple the gain on the S&P/ASX 200 index in the same period.

‘Important Challenges’

Australia’s four biggest banks are among nine of the world’s 100 largest lenders that are rated AA or higher by Standard & Poor’s. The domestic economy expanded 1 percent in the first half of the year as the U.S., the U.K. and Japan fell into recessions.

Still, the Australian banking system faces “some important challenges,” including possible higher loan defaults, the central bank said in its Sept. 24 report. Provisioning charges for bad debts will probably rise in the “near term,” it said.

Net income at Commonwealth Bank slipped to A$4.72 billion from A$4.79 billion in the 12 months ended June as companies defaulted on loans amid the global financial crisis. Norris said in August that bad debts in the current year will be similar to those reported in the 12 months ended June. Commonwealth made A$4.9 billion of bad loan provisions in fiscal 2009.

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

Last Updated: September 30, 2009 01:38 EDT