UPDATE 3-NAB raising $2.3 bln in share sale; bad debts rise

* NAB raising funds for expansion, boosting balance sheet

* Share placement to be priced at maximum 10 pct discount

* June quarter bad debt charge A$1.06 bln (Recasts with CEO and analyst comments, share and CDS prices)

By Mette Fraende and Sonali Paul

SYDNEY/MELBOURNE, July 22 (Reuters) - National Australia Bank (NAB.AX) is selling new shares to raise up to A$2.75 billion ($2.25 billion) as a buffer against rising bad debts and to scout for acquisitions, signaling a tough second-half for lenders.

The unexpected share sale on Wednesday by Australia's largest lender, which comes after its A$3 billion equity issue in November, sparked concerns about volatile industry conditions and knocked shares of NAB's rivals. NAB shares were suspended from trading for a day, pending the completion of the placement.

Australian banks have avoided much of the pain hitting U.S. and European banks, partly because they had little exposure to U.S. toxic debts and to countries outside Australia.

However, the banks are feeling the pinch from rising bad debts as the economy continues to slow at home and unemployment rises.

"They're allowing for further deterioration in asset quality, which is happening. Obviously, provisionings are still rising, so they are using it for a bit of balance sheet conservatism," said Christopher Hall, banking analyst at Argo Investments.

"Plus they've got some opportunities they are looking at," he said.

The government expects the jobless rate to peak at 8.5 percent by mid-2011, up from 5.8 percent now, which is a six-year high.

"The capital raising supports our priority to keep the bank safe given the uncertain environment, while enabling us to pursue value creating opportunities," NAB Chief Executive Cameron Clyne told a briefing for analysts in Sydney. Clyne said the next two half-year periods would be "difficult".

The share issue will boost the June 30 proforma Tier 1 ratio, a measure of capital strength of banks, to about 8.8 percent from about 8.2 percent.

ACQUISITIONS

Just last month, NAB bought most of British insurer Aviva Plc's (AV.L) Australian businesses for A$825 million to expand in wealth management.

Peter Vann, head of investment research at Constellation Capital Management said further acquisitions by NAB would be viewed positively, with any overseas expansion in the United States creating synergies.

"Given they've got Great Western in the States, if they can find something of a like nature, that would get them some extra synergies."

NAB bought Great Western Bancorporation, a regional agribusiness bank in South Dakota, in November 2007 for $798 million.

Clyne said another area the group was looking to expand in was small to mid-sized businesses and had already hired 122 new bankers to increase its market share. The Aviva unit's acquisition was the first under Clyne, and future acquisitions were at this point unlikely to exceed the size of its Aviva investment.

Rumours have circulated for some time that NAB was interested in acquiring the private wealth management division of Goldman Sachs (GS.N).

"I think there's a good chance that's going to happen," Hall said.

BAD DEBTS RISE

NAB also said its June quarter cash earnings were A$900 million, with revenue growth down from the first half. It reported a 9.4 percent fall in cash profit in the first half to A$2 billion.

Asset quality had weakened as expected, with its bad loan rate increasing to 177 basis points at the end of June from 138 basis points in the previous quarter.

The group charge for bad and doubtful debts was A$1.06 billion for the quarter compared with A$1.8 billion for the first half. The numbers were in line with expectations, Vann said.

"Its around expectations. Bad debts have gone up, arrears have gone up," he said.

The bad-debt rate at its UK banks was at 259 basis points at June 30, up 60 basis points from the previous quarter.

The share placement, underwritten by Deutsche Bank (DBKGn.DE), Goldman Sachs JBWere and Bank of America's (BAC.N) Merrill Lynch will be priced at at least A$21.20 against NAB's last trade at A$23.58, which may raise A$2 billion.

The bank will offer retail shareholders up to A$750 million in new shares. This tranche is not being underwritten.

Trading in the company's shares was halted in both Australia and New Zealand pending the placement. Spreads on five-year NAB CDS were unchanged at 90 basis points on Wednesday. They have tightened since March, when they were at 222.3 basis points, but are wider compared with the 73.1 basis points in June.

Commonwealth Bank (CBA.AX) shares were down 1.4 percent and Westpac Bank (WBC.AX) fell 1.8 percent. The broad Australian stock market was up 0.4 percent.

($1=1.223 Australian Dollar) (Additional reporting by Cecile Lefort and Anirban Nag; Editing by Muralikumar Anantharaman)