May 21 (Bloomberg) -- Australia’s banks increased fee income 8.3 percent last year, buffering earnings from bad debts that are climbing as the economy sinks into recession.

The nation’s banks earned A$11.6 billion ($9 billion) in fees compared with A$10.7 billion in 2007, according to Reserve Bank of Australia data. They earned A$6.74 billion from businesses and A$4.85 billion from households, the data showed.

Higher fee income is shielding earnings for the nation’s lenders as bad debts swell. Unlike global firms such as UBS AG and Citigroup Inc., Australia’s banks have avoided losses through the worst financial crisis since the Great Depression and haven’t needed the bailouts provided to dozens of lenders in the U.S. and Europe.

Westpac Banking Corp., Australia & New Zealand Banking Group and National Australia Bank Ltd., three of the nation’s four biggest lenders, posted an average 10 percent drop in earnings for the six months ended March 31 and predicted defaults will keep piling up. Losses on bad debts for the three banks jumped 147 percent to A$4.9 billion in the six months.

Australia’s gross domestic product declined 0.5 percent in the fourth quarter from the previous three months, a report showed on March 4.

To contact the reporter on this story: Malcolm Scott in Sydney at Mscott23@bloomberg.net

Last Updated: May 20, 2009 21:58 EDT