Australia's Westpac says bad debts have peaked

* Westpac says peak of bad-debt cycle reached

* H2 cash profit falls 10.5 pct, result above forecast

* Shares gain by as much as 2.6 percent

* Says not actively scanning for acquisitions

By Morag MacKinnon

SYDNEY, Nov 4 - Westpac Banking Corp <WBC.AX>, Australia's third-biggest lender, gave a brighter outlook for bad debts than its rivals on Wednesday, saying the worst was over and vindicating market expectations for healthy growth ahead.

The bank posted a 10.5 percent fall in second-half cash profit, hurt by higher bad-debt charges, but its result narrowly beat the top of market forecasts and contained an outlook that was more confident than its major competitors.

"We are right now at the top of the credit cycle," Chief Financial Officer Phil Coffey told reporters.

Westpac's relative optimism on bad debts is due to its greater presence in the stable home-lending market.

In contrast, National Australia Bank <NAB.AX> is more exposed to the troubled local business-lending market and Australia and New Zealand Banking Group Ltd <ANZ.AX> has the biggest stake in recession-hit New Zealand.

Both banks warned recently that bad debts had yet to peak.

Paul Xiradis, head of Ausbil Dexia in Sydney, which has A$10 billion under management, said Westpac appeared more confident now, compared with its previous outlooks.

"They're a little bit more definitive in their statement suggesting that the bad and doubtful debt cycle has probably peaked," Xiradis said.

Westpac shares jumped 2.6 percent in early trade before easing back to A$25.62, up 0.8 percent in a weak overall market.

Last week, NAB and ANZ issued solid profit results, also beating market forecasts, with NAB saying that bad debts would take another 6 to 12 months to peak.

Australian bank shares have rallied strongly this year, at more than double the pace of the wider market, as earlier fears of recession and a funding crisis proved to be unfounded.

Bad debts have surged in Australia but there was no crisis. Local banks are now cashed up and looking for acquisitions.

CONSUMERS TO DRIVE GROWTH

Westpac made a cash profit of A$2.332 billion ($2.11 billion) for the six months ended Sept 30, compared with a pro forma A$2.605 billion a year earlier. The year-ago figure was adjusted to include earnings from the recently acquired St George bank.

The average forecast of eight analysts surveyed by Reuters was for a cash profit of A$2.24 billion, with the forecasts ranging from A$2.18 billion to A$2.31 billion.

Total asset-impairment charges more than doubled to A$1.681 billion for the half-year while overall stressed assets shot up to 3.1 percent of the loan book from just 1.3 percent.

For an earnings graphic, click

http://graphics.thomsonreuters.com/119/AU_WSTP1109.gif

Total revenue for the group grew 10 percent in the second half as Westpac's purchase of St George, previously Australia's fifth-largest bank, boosted group market share.

Households now make up 65 percent of Westpac's total loans with no major rise in credit problems, CFO Coffey said.

Coffey said the group was expecting 2-3 percent credit growth in the year to end-September 2010, led by robust housing loan growth, which would make up for any slowing in business lending.

Westpac paid a final dividend of 60 cents a share, with the full-year payout falling 18 percent to 116 cents.

Brett Le Mesurier, an analyst at Axiome Equities in Sydney, said Westpac's result chimed with Australia's other major banks in showing higher net interest margins and slowing loan growth.

"There's still an increase in impaired assets but at a decreasing rate, indicating the worst part of the credit cycle is probably passing," Le Mesurier said.

(Reporting by Morag MacKinnon, Editing by Mark Bendeich and Valerie Lee)