Nov. 4 (Bloomberg) -- Westpac Banking Corp. said second- half profit fell 10 percent, less than analysts expected, as the lender joined Australia & New Zealand Banking Group Ltd. in saying bad debts have peaked as the economy recovers.

Cash earnings fell to A$2.33 billion ($2.1 billion) in the six months ended Sept. 30 from A$2.61 billion a year ago, Australia’s second-biggest bank said today, using pro-forma figures to reflect last year’s takeover of St. George Bank Ltd. The average of four analyst forecasts compiled by Bloomberg was profit of A$2.23 billion.

Chief Executive Officer Gail Kelly, like local counterparts, has seen bad debts mount since taking over in February 2008 as the economy slowed. The bank rose in Sydney trading today after it said a domestic recovery will spur lending growth next year and loan-default charges are unlikely to rise.

“That we can say bad debts have peaked or are peaking is a tremendous outcome,” said Don Williams, chief investment officer at Platypus Asset Management Ltd., which manages A$1.4 billion of assets including Westpac stock. “If that’s the case, it’s a very short bad-debt cycle. As long as the Aussie economy continues to tick along, credit growth will come back.”

Westpac added 1.4 percent to A$25.79 at the close, taking this year’s advance to 52 percent. ANZ Bank added 0.7 percent. Commonwealth Bank of Australia gained 0.2 percent.

Westpac’s impairment charges in the second-half more than doubled to A$1.68 billion, and total provisions for impairment charges climbed to A$4.73 billion from A$4.48 billion in March.

‘Credit Cycle’

“Our forward indicators suggest we are right now at the top of the credit cycle,” Chief Financial Officer Phil Coffey told reporters. “That’s not to say that we are not going to see ongoing business stress. Some companies will be feeling pretty good and others will be feeling that life’s still pretty tough. Overall the economy is still in a recovery phase.”

Credit growth in the year ending Sept. 30, 2010, might be as high as 3 percent and will be led by household demand, he said. Business lending “may be flat to slightly negative,” he said.

Australia’s lenders have weathered the slowdown as the local economy avoided recession. The nation’s central bank yesterday raised its benchmark interest rate by a quarter percentage point for the second time in four weeks, becoming the first to increase borrowing costs twice this year as the global economy recovers.

Faster Growth

Australian Treasurer Wayne Swan said Nov. 2 that the economy will grow faster than previously forecast, expanding 1.5 percent in the 12 months to June 30, 2010, compared with a May prediction of a 0.5 percent contraction. The growth follows record interest-rate cuts and a A$42 billion government stimulus.

ANZ Bank CEO Michael Smith said last week that the bad debt cycle had “probably stabilized” and the pace of defaults had slowed. National Australia Bank Ltd. Chief Cameron Clyne said he was “cautious” about the outlook.

Westpac’s full-year net income for the year to Sept. 30 fell 11 percent to A$3.45 billion.

Earnings from New Zealand declined 50 percent to NZ$236 million ($170 million) in the year, weighed down by a NZ$402 million increase in impairment charges mostly due to exposure to commercial property. Earnings from the institutional bank slumped 58 percent to A$361 million, the bank said.

‘Consumer Delinquencies’

Collective provisions to credit risk weighted assets increased by 37 basis points, or 0.37 percentage point, to 142 basis points. The credit health of the portfolio “has begun to stabilize over the fourth quarter, and consumer delinquencies have improved over the last six months,” the bank said.

“Their risk management has been far superior to the other majors,” said Michelle Lopez, who helps manage A$1.2 billion at Aberdeen Asset Management Ltd. in Sydney.

Last week, National Australia Bank, the country’s biggest corporate lender, reported a loss of A$75 million in the six months ended Sept. 30 after bad-debts charge climbed. It was the bank’s first loss in at least nine years.

ANZ Bank, Australia’s second-biggest provider of business loans, said profit rose 13 percent in the same period as lending income increased and bad debts slowed.

Capital Ratio

Westpac CEO Kelly said the bank will pay a final dividend of 60 cents a share, taking its full-year payout to A$1.16. In the first half, Westpac cut its payout for the first time since 1992, according to data compiled by Bloomberg.

Westpac’s Tier 1 ratio, a measure of the bank’s ability to absorb losses, was 8.1 percent, a “very comfortable” level, CFO Coffey said. Its cost-to-income ratio fell 3.1 percentage points to 40.2 percent.

The net interest margin, the difference between what the bank earns from loans and pays to depositors, increased 30 basis points from a year ago to 2.32 percent. A basis point is 0.01 percentage point.

“We have remained strong in uncertain times by being well capitalized, well funded and well provisioned,” Kelly said in the bank’s statement.

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

Last Updated: November 4, 2009 00:28 EST