Aug. 12 (Bloomberg) -- Commonwealth Bank of Australia, the nation’s biggest lender by market value, said profit fell 11 percent in the second half as business loans soured and earnings at its wealth management unit declined.

Net income dropped to A$2.15 billion ($1.78 billion) in the six months ended June 30, the company said today, from A$2.42 billion a year ago. The bank’s stock rose 3.2 percent in Sydney trading after full-year earnings beat analysts’ estimates.

To counter rising business loan defaults, Chief Executive Officer Ralph Norris has expanded in the home lending market with the purchase of HBOS Plc’s Bankwest unit and loans from General Electric Co.’s Wizard Mortgage Corp. He’s also benefited from government guarantees on deposits and debt issues, helping the bank increase its net interest margin, a measure of lending profitability, by 8 basis points.

“This number is very strong, very credible and very healthy in comparison to any bank you can find in the world,” said Prasad Patkar, who helps manage the equivalent of $1.2 billion at Platypus Asset Management in Sydney. “If the economy behaves itself, then the bad debt cycle also won’t be as bad it was expected to be.”

Commonwealth posted full-year earnings of A$4.72 billion, compared with the median estimate of eight analysts surveyed by Bloomberg for A$4.64 billion. Excluding its acquisition of HBOS Plc’s Bankwest unit in December, the Sydney-based bank’s earnings in the second half were A$2.35 billion.

Sells Securities

The bank’s shares, which slumped 51 percent last year, rose A$1.39 to A$45.32, bringing their 2009 rally to 57 percent, more than the MSCI World/Banks Index’s 29 percent gain.

Commonwealth also announced plans to raise at least A$700 million by selling hybrid securities to strengthen its balance sheet. It will pay a second-half dividend of A$1.15 a share, down from A$1.53 a year ago.

Bad debt charges jumped to A$1.44 billion in the second half, up from A$597 million a year ago. They declined from A$1.61 billion in the six months to Dec. 31. The bank took a charge of A$113 million on loans to Bankwest customers.

It also put aside A$3.23 billion for possible future loan losses. Bad debts as a proportion of loans increased to 0.86 percent, the bank said today.

Commonwealth’s Tier 1 Capital Ratio, a measure of financial strength, was at 8.07 percent at June 30.

‘Challenging’ Year

“The 2009 financial year has been a challenging one and the outlook remains uncertain,” Norris said in a statement. “Overall credit growth in Australia is expected to slow through 2010 and economic conditions are likely to remain challenging.”

Institutional banking cash earnings fell 78 percent from a year ago due to a higher impairment expense, international financial services earnings lost 19 percent, while cash wealth management earnings dropped 61 percent, Commonwealth said.

Funds under administration as at June 30 decreased 9 percent to A$169 billion, the bank said.

Commonwealth’s biggest rivals -- Westpac Banking Corp., Australia & New Zealand Banking Group and National Australia Bank Ltd. -- posted an average 10 percent drop in earnings for the six months ended March 31 and predicted defaults will keep piling up into 2010.

Commonwealth’s drop follows earnings declines at DBS Group Holdings Ltd., Southeast Asia’s biggest bank, and Bank of America Corp., the biggest U.S. lender. DBS last week reported a 15 percent decline in second-quarter profit. Bank of America last month said second-quarter profit fell on higher credit-card and home-loan losses.

Navigating the Downturn

Offsetting institutional and wealth management declines, full-year retail banking income increased 10 percent, while business and private banking services rose 2 percent. Commonwealth bought Bankwest from HBOS Plc last year for A$2.1 billion to increase its share of Western Australia’s banking market. It bought the loan book of Wizard from GE in December.

Commonwealth has “navigated the downturn in almost textbook fashion,” said Rhett Kessler, who helps managed $1 billion at Pengana Capital Ltd. in Melbourne. “The company is in excellent shape to take advantage of a domestic recovery.”

Australian home-loan approvals rose in June for a record ninth month as borrowing costs at a half-century low and government cash handouts stoked demand among first-time buyers, government data on Aug. 10 showed. The number of loans granted to build or buy houses and apartments climbed 1.1 percent to 65,151 from May, when they gained 2.2 percent.

Government grants to first-time buyers of as much as A$21,000 have triggered the longest run of gains in home loans since the figures were first published in 1975 and driven up property prices. Demand for home loans has also been stoked by a record 4.25 percentage points of cuts to the benchmark interest rate between September and April.

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

Last Updated: August 12, 2009 02:21 EDT