Australia's CBA H2 profit flat, drops Amro talks

SYDNEY (Reuters) - Commonwealth Bank of Australia Ltd (CBA) (CBA.AX) posted flat second-half earnings as funding costs rose and bad loan charges increased, and it warned of a challenging year ahead due to volatile global markets.

CBA, the country's second-biggest lender, also said it was pulling out of talks with Royal Bank of Scotland (RBS.L) to buy ABN AMRO's Australian and New Zealand operations, citing possible funding difficulties. The business had been valued by analysts at about A$777 million ($676 million).

Confidence in the Australian banking sector took a hit last month when top lender National Australia Bank (NAB.AX) (NAB) and Australia and New Zealand Banking Group (ANZ.AX) (ANZ) issued profit warnings and rising bad debt charges.

CBA is the first of Australia's top four banks to report earnings in a market where the global credit crunch has raised costs, where interest rates are at a 12-year high and economic growth has begun to slow, fuelling worries of large loan losses.

"I think they (CBA results) are encouraging. The provisions they have taken are up but well within comfortable levels," said Mark Nathan, fund manager with Fortis Investment Partners.

"Australia is certainly going to get through (the credit crisis) without any material long-term impact. There's no risk of Australian banks going under," he added.

This week it was investment company Babcock & Brown Ltd's BNB.AX turn to warn that its full-year earnings would not beat last year's due to difficult market conditions.

St George Bank Ltd SGB.AX and Westpac Banking Corp (WBC.AX), currently engaged in the country's biggest banking merger, have sought to reassure the market that they were not suffering from the global credit crunch.

CBA's shares fell 1.5 percent, roughly in line with the Australian benchmark index's 1.7 percent decline .AXJO.

PROFIT FLAT

CBA said January-June cash profit was A$2.3 billion ($2.0 billion), little changed from A$2.33 billion in the same period last year and matching analysts' forecasts of an average cash profit of A$2.34 billion, according to a Reuters poll.

Cash profit is after tax and minority interests but before pension plan expenses and treasury share adjustments.

It said loan impairment charges rose by A$496 million in the year to June 30 over the prior year, as tough markets forced it to increase provisions against bad loans.

CBA said in spite of recognising challenging markets ahead, it remained positive on first half outlooks for 2009, and would be a very profitable bank next year.

The bank said its decision to pull out of talks to buy ABN AMRO's Australian and New Zealand operations had been influenced by last months' news of rising bad debt provisions for NAB and ANZ.

The announcements rocked the reputation of Australian banks in the international funding market, leading CBA's board to decide the acquisition would not be in the shareholders' best interest, Chief Executive Ralph Norris said on Wednesday.

"Obviously ... it was, and would be, a requirement to raise significant funds for the book we would be taking over. We agreed it was prudent to not go ahead," Norris said, adding that they did not get to discuss pricing further.

Some analysts believed CBA's decision to withdraw from discussions to buy ABN AMRO Australia could mean it was waiting for prices to come down further.

"There may be better opportunities around, and it could be because capital is at a premium now. They may think there is further weakness coming through," Karara Capital investment manager Rohan Walsh said.

(Editing by Louise Heavens)