UPDATE 2-Australia's ANZ bank cautious despite H2 recovery

* H2 cash profit A$2.43 bln, above consensus forecast

* But reluctant to call end to bad-debt cycle

* Australian dollar strength could weigh on 2010 (Adds fund manager quote, share reaction, detail)

By Morag MacKinnon

SYDNEY, Oct 29 (Reuters) - Australia and New Zealand Banking Group Ltd (ANZ.AX), the smallest of Australia's four big lenders, refused on Thursday to call an end to the bad debt cycle, despite a strong recovery in second-half profits that beat forecasts.

Chief Executive Mike Smith said the global financial crisis was only just beginning to play out and although he was "pretty positive" about the future, global and domestic economies continued to be fragile and were likely to feel some aftershocks.

ANZ shares opened down 2.8 percent, with the 79 percent rebound in cash profits eclipsed by the bank's cautious outlook and a global sell-off of financial stocks. At 2328 GMT, the stock had regained some ground to stand at A$23, down 1.5 percent.

"This isn't over yet," Smith said. "Often it's the aftershocks that do the most damage," he added.

Karara Capital investment manager Rohan Walsh said the shares, which had risen 53 percent this year, had been driven higher on expectations of even more exceptional results.

"That was always an unrealistic expectation," Walsh said.

"I don't think there's anything in the results that would change your medium-term expectations for the sector, which I think would still be encouraging."

The strong turnaround in profit came a year after the bank's profit slumped by a third due to a sharp rise in bad-debt charges as the global credit crunch took hold, resulting in the bank's first full-year profit decline in 10 years.

"The broad trends we're seeing seem to be evidence that bank profits have troughed and the trends are encouraging for the next couple of years," Walsh said.

Cash net profit for the half year ended Sept 30 rose to A$2.43 billion from A$1.36 billion from a year earlier. That beat the mean forecast of eight analysts surveyed by Reuters of A$2.04 billion, and was outside the upper range of forecasts.

Still, bad debt charges in the second half jumped 29 percent from a year earlier to A$1.63 billion.

In New Zealand, where the bank generates almost a fifth of its revenue, bad debts nearly tripled in the second half from a year earlier.

While the bad debt cycle was likely close to hitting a peak, Smith was reluctant to call an end to it and said provisions were likely to be similar in the first half of this financial year.

A strong Australian dollar was one of the headwinds the bank would face in 2010, Smith said.

Cash earnings are the key numbers analysts focus on because they exclude one-off items and non-cash accounting items, and form the basis for dividends payable to shareholders.

ANZ will pay shareholders a final dividend of 56 cents.

Smith's cautionary tone follows that of Cameron Clyne, chief executive of National Australia Bank Ltd (NAB) (NAB.AX), who warned that historically high levels of capital needed to be maintained in an uncertain economic environment.

NAB, the nation's biggest lender, on Wednesday reported an 8 percent rise in second-half cash profit.

Westpac Banking Corp (WBC.AX), the third-largest bank, reports earnings on Nov. 4.

ANZ shares, which closed at A$23.35 on Wednesday,were trading at A$22.86 at 2309 GMT. (Additional reporting by Sonali Paul; editing by Mark Bendeich)