CORRECTED - CORRECTED-UPDATE 3-NAB caution dents hopes of cash return

(Corrects paragraph 14 to clarify cash profit is for six-month period, not July-September)

* H2 cash profit A$1.81 bln vs A$1.74 bln estimate

* To focus on conservative capital management

* Sees business lending growth contracting in 2010

* Says could take up to a year to assess bad-debt cycle

* NAB shares down 2.8 pct, rivals also drop

By Morag MacKinnon

SYDNEY, Oct 28 - National Australia Bank Ltd <NAB.AX> dampened hopes the nation's lenders will return surplus capital to investors anytime soon, saying it needed the buffer as economic headwinds remained and as bad debt charges rose.

The cautious outlook from Australia's largest bank showed it will be a while before the trickle down effects of a recovering economy are felt. The comments outweighed NAB's better-than-expected second-half cash profit, and pushed bank shares lower on Wednesday.

"The bottom line is, you are not going to get a share buy-back from one of these companies until they are sure about the future," said Chris Weston, institutional dealer at IG Markets.

Australia's big banks are sitting on an estimated A$20 billion in surplus capital after raising equity to withstand an economic downturn that has been shallower and shorter than feared.

There had been persistent talk that NAB and its three major rivals could be persuaded to return some cash.

NAB shares fell 2.8 percent to A$29.83 on Wednesday, underperforming a 1.1 percent drop on the benchmark share index <.AXJO>. NAB shares had risen 47 percent this year on optimism that the worst of the credit crunch was over.

"I tend to think we haven't seen the kind of misery that happens in a credit deflation yet. And I think the revenue growth will continue to slow for the banks," said Hugh Giddy, managing director of boutique fund manager Cannae Capital Partners.

Shares in smaller rivals Australia and New Zealand Banking Group <ANZ.AX> and Westpac Banking Corp <WBC.AX> were down 2 percent and 2.5 percent, respectively.

HEADWINDS

Bad-debt charges at NAB, which makes the bulk of its income from the home market, rose 14 percent to A$2 billion for the second half from A$1.76 billion a year earlier.

CEO Cameron Clyne told analysts it would take as much as 12 months before he could say whether the bad-debt cycle had peaked. He also told a media briefing that NAB's business lending growth would contract in 2010. NAB's Tier-1 capital adequacy ratio climbed 65 basis points to 8.96 percent at Sept. 30, above regulatory requirements, but Clyne said this cushion was necessary to deal with a still uncertain environment.

"Whilst we've landed at 8.96 percent for this half we can see a range of headwinds that could see us quite quickly settling around 8.5," he told a media briefing.

"That's why it's important for us to be strong on capital to give us a buffer against those potential headwinds."

NAB's cash profit rose to A$1.81 billion for the six months to end-September from A$1.68 billion a year earlier. The mean forecast of 8 analysts surveyed by Reuters was for cash profit of A$1.74 billion.

For an earnings Graphic, click http://graphics.thomsonreuters.com/109/AU_NAB1009.gif

The bank gave no specific earnings guidance for the current fiscal year, saying it would focus on cutting costs.

It set a final dividend of 73 cents, compared with 97 cents a year earlier, and 5 cents above a consensus forecast of analysts on Thomson Reuters I/B/E/S.

NAB has spent over $1 billion in the past year to beef up its wealth management, insurance and mortgage businesses, and Clyne said it continues to look at acquisition opportunities. (Additional reporting by Denny Thomas and Sonali Paul; editing by Mark Bendeich and Muralikumar Anantharaman)