UPDATE 2-ANZ H2 profit beats forecast; bad debt provisions rise
* H2 underlying profit A$3.04 bln vs A$2.95 bln consensus
* Core tier I capital at 10 pct
* Final dividend of 79 cents/share
* Says operating environment tough (Adds fund manager comment, details, shares)
SYDNEY, Oct 25 (Reuters) - Australia and New Zealand Banking Corp beat earnings forecasts to post a third straight year of record profits, aided by cost cuts, but a rise in bad debt charge underlined the challenge facing Australia's banks.
Australia, among the few developed countries to avoid a recession during the global financial crisis, is coming under pressure from slowing Chinese growth, which is weighing on the mining sector that has so far helped shield its economy.
The country's "Big Four" banks -- ANZ, National Australia Bank, Commonwealth Bank of Australia and Westpac -- will still post a combined record profit of more than $25 billion in 2011/12, but growth has slipped to a three-year low and bad debts are rising as the economy cools.
"Bad debts provisions are showing a clear upward trend, a product of the economic environment. One wouldn't want that to develop in a deeper problem going forward," said Angus Gluskie, chief investment officer at White Funds Management, which owns ANZ shares.
ANZ shares fell about 0.8 percent in early trade in a flat overall market as investors focussed on falling net interest margins and rising bad debt charge in a result that otherwise just topped expectations.
ANZ, which aims to earn nearly a third of its annual profit in Asia by 2017 as Australian growth slows, reported underlying second-half profit of A$3.04 billion ($3.14 billion), compared with A$2.83 billion a year ago and A$2.95 billion expected by analysts.
Full-year underlying profit, which excludes one-offs, non-cash accounting items and investment gains or losses, was a record A$6.01 billion.
"The results demonstrate continued progress with our super-regional strategy, while also adapting ANZ to the lower growth environment where tight management of costs and capital is increasingly important," Chief Executive Michael Smith, the architect behind the bank's Asian strategy, said in a statement.
Asia Pacific, Europe and America business, which is primarily drawn from its Asian expansion, boosted underlying profit by 28 percent, with Asia Pacific contributing about 20 percent of the bank's revenue.
ANZ said second-half bad debt provisions on an underlying basis rose to A$686 million from A$551 million a year ago, echoing a hike in provisions last week by larger rival National Australia Bank.
NAB is due to report its earnings on Oct 31, followed by No.3 lender Westpac Banking Corp on Nov 5. Commonwealth Bank of Australia updates markets on its first quarter on Nov 7.
WEAKER MARGIN, TIGHTER COST
ANZ said its net interest margin, a key measure of core bank profits, slipped 3 basis points, excluding the global markets division, as intense competition for deposits among banks, racing to meet new global bank liquidity rules, jacked up rates.
Margins fell for institutional banking, which includes trade finance, markets business and transaction banking, due to market weakness and as customers moved to low risk assets.
Lending grew 8 percent while deposits grew 12 percent, as Australians turned to saving in turbulent times.
In the broader industry, bank lending is currently tickling up at an annual rate of about 4 percent, compared with an historic average of over 10 percent.
ANZ said overall costs were flat from the preceding six months period as it cut employee numbers by about four percent to 48,329.
The bank announced a dividend of 79 Australian cents per share.
ANZ shares have risen about a quarter so far this year, making it the second-best performer among Australia's big four banks. The broader market has climbed 11 percent.
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