Oct. 28 (Bloomberg) -- National Australia Bank Ltd., the country’s biggest corporate lender, swung to its first loss in at least nine years after charges for bad debts climbed and it set aside funds for a tax settlement in New Zealand.

The net loss of A$75 million ($69 million) in the second half ended Sept. 30 compared with a profit of A$1.85 billion in the year-earlier period, the Melbourne-based bank said in a statement today. Cash earnings, which strip out one-time items, rose 8 percent to A$1.81 billion.

National Australia fueled a decline by banks in Sydney trading after becoming the first of the country’s four biggest lenders to report a loss since the collapse of Lehman Brothers Holdings Inc. in 2008. Chief Executive Officer Cameron Clyne said he was “cautious” about the outlook and said corporate lending may slow further in the current fiscal year.

“It’s sector-wide selling,” said Tom Quarmby, an analyst at Macquarie Group Ltd. in Sydney with an “outperform” rating on National Australia. “The loss may be catching the eye of a few offshore investors.”

National Australia fell 2.8 percent at the close. Commonwealth Bank of Australia, the nation’s largest lender, lost 3.8 percent. Australia & New Zealand Banking Group Ltd. dropped 1.7 percent and Westpac Banking Corp. fell 2 percent.

Charges for bad and doubtful debts at National Australia rose to A$2 billion in the second half from A$1.76 billion a year earlier. The lender also set aside A$542 million for a tax bill after New Zealand authorities reviewed structured finance transactions it carried out.

Business Lending

Bank lending to businesses may fall 5 percent in the 12 months ending Sept. 30, 2010, and be flat the following year, the company said in a presentation. It may take six months to judge whether bad debts have peaked because Australia’s economy is being supported by government stimulus, National Australia executives said on a conference call.

“This has been a period characterized by significant fiscal as well as monetary policy stimulus,” Clyne said in an interview. “Hence we’re saying just that note of caution to see how resilient the economy will be as those things come off.”

Still, he said he may consider reducing capital buffers that protect the bank against future loan losses as the economy recovers. Australia’s central bank this month became the first among Group of 20 nations to raise interest rates since the height of the global financial crisis.

Retail Credit

Retail customers may be more resilient to defaults than in previous periods of rising interest rates because many chose to repay debts as borrowing costs were falling, Clyne said.

“So even in a potential environment of rising unemployment -- the key driver of defaults -- we may not necessarily see quite the deterioration in retail credit as in other cycles,” he said.

National Australia may reduce its Tier 1 capital ratio, a measure of the lender’s ability to withstand future losses, “when conditions become more predictable,” it said. That ratio climbed 65 basis points from March to 8.96 percent on Sept. 30. A basis point is 0.01 of a percentage point. The bank will pay a final dividend of 73 cents, down from 97 cents a year ago.

Positive Signs

“There are a number of positive signs but you also need to be somewhat cautious,” Clyne told reporters in Sydney. Asset quality “might be stabilizing, but there are still a number of issues to be worked through.”

Second-half net interest income, or revenue from borrowers minus interest paid to depositors, rose to A$6.19 billion from A$5.84 billion, National Australia said.

“The outlook is suggesting the worst is over,” said Hugh Dive, who helps manage about $3 billion at Investors Mutual Ltd. including National Australia shares. “Once bad debts start coming off, if they can maintain market share with a similar margin, we’ll see expanded earnings going forward.”

The nation’s top four banks may amass as much as A$18 billion of surplus Tier 1 capital before the end of next year, Credit Suisse Group AG said in an Oct. 14 report. The banks may return A$15 billion of that to investors through share buybacks as asset quality improves and bad debts ease, Credit Suisse said.

National Australia in September bought Aviva Plc’s Australian wealth advisory and life insurance units for A$825 million. In August, the bank agreed to purchase the mortgage business of Challenger Financial Services Group for A$385 million. A month earlier, it said it would buy most of Goldman Sachs JBWere Pty’s private brokerage for A$99 million.

Full-year profit fell as bad debts swelled and earnings slumped in the recession-hit U.K., where National Australia runs Clydesdale Bank and Yorkshire Bank. Net income dropped to A$2.59 billion from A$4.54 billion.

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

Last Updated: October 28, 2009 03:41 EDT