RPT-PREVIEW-Higher provisions set to roil Australian banks

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* What: Australian banks' first-half earnings

* When: From April 28

* Results seen hit by rising provisions, slowing economy

By Mette Fraende

SYDNEY, April 24 (Reuters) - Australia's major banks are expected to reveal growing pressures on profits when they kick off reporting next week, hurt by rising provisions for bad debts and slowing loan growth, as the nation's economy descends into a recession.

The banks have held up well thus far compared with many of their peers in Europe and the United States due to their low exposure to toxic debts and limited focus on the world outside Australia. Their shares have fared better than the market.

But they are increasingly feeling the impact of a slowing domestic economy, which is causing unemployment to rise and is throwing up severe challenges for businesses. Investors are waiting to find out how the banks assess the situation ahead.

"We'll get a better picture of when the bad debt cycle will peak and how high it will go. Maybe not a full picture, but a better picture," said James Ellis, director and Australian banking analyst at Credit Suisse.

The focus will also be on the adequacy of the banks' capital levels, as well as any dividend cuts, Ellis added.

Australia's gross domestic product shrunk by 0.5 percent in the fourth quarter of 2008, and the country is expected to go into a recession for first time since 1992 this year. Unemployment stood at 5.7 percent in March and is expected to exceed 7 percent by the end of the year, according to government statistics.

The biggest hit could be taken by investment bank Macquarie Group (MQG.AX), which warned in February profits would halve this fiscal year, its first annual profit fall in 17 years. Its second-half profits are seen sliding by about 64 percent.

The nation's largest lender, National Australia Bank (NAB.AX) is seen reporting a 7 percent decline in its first-half cash profit, and the fourth-biggest lender, Australia and New Zealand Banking Group (ANZ.AX) is expected to post a 26 percent drop.

OUTPERFORMERS

Cash earnings, widely used by analysts as an indicator of core profit, exclude one-off items and non-cash accounting items and form the basis for dividends.

"ANZ is going to be impacted by their credit default swap derivatives...they are going to have to take a bigger provision on them. And there's the ongoing bad debts," said Mark Nathan, portfolio manager at Australian fund manager Fortis Investment Partners. Going against the trend with an expected 20 percent rise in first half profit is No.2 lender, Westpac Banking Corp (WBC.AX), following its takeover of Australia's fifth-biggest bank, St. George Bank, last year.

Westpac is also widely expected to be the third major bank to announce a dividend cut. That follows similar moves earlier this year from ANZ and NAB. ANZ then became the first of Australia's top four banks to announce a dividend cut since the early 1990s.

Commonwealth Bank of Australia (CBA.AX) is also expected to announce a dividend cut when it provides the market with a quarterly update on May 13. The No. 3 lender warned in February of a possible dividend cut after posting a 16 percent fall in half-year cash profit.

Bank shares have outperformed in 2009. So far this year, NAB is up 6.0 percent, ANZ has gained 10.2 percent, WBC 18.6 percent, CBA 23.5 percent and Macquarie 10.3 percent. Against these, the benchmark S&P/ASX 200 index .AXJO is down 0.8 percent.

Date Cash profit Pct change

(A$bln) NAB (NAB.AX) Apr 28 2.080 - 7.0 ANZ (ANZ.AX) Apr 29 1.239 -26.0 Westpac (MQG.AX) May 6 2.210.6 +20.0 Macquarie* (MQG.AX) May 1 0.867.5 -52.0

* Full-year result, estimate is net profit. Note: CBA runs on a different July-June reporting year. (Editing by Muralikumar Anantharaman)