UPDATE 2-Australia's Westpac H2 cash profit beats forecasts
* H2 cash profit up 9 pct to A$3.4 bln
* FY impairment charges up 22 pct to A$1.2 bln
* Says balance sheet strengthened, funding profile improved
* Final dividend of 84 cents (Adds fund manager comment, shares)
MELBOURNE, Nov 5 (Reuters) - Westpac Banking Corp, Australia's third-largest lender by assets, reported a 9 percent rise in second-half cash profit, beating expectations on tight costs and said it had improved its balance sheet despite a rise in bad debts.
Westpac said it expected to continue its growth momentum, as Australia's economy had remained relatively robust, although it warned system credit growth was likely to be modest.
Westpac is the last of Australia's 'big four' banks to report full-year results, in a mixed earnings season as they face their slowest profit expansion in three years and bad debt provisions are seen rising.
Australia's second-largest mortgage lender said second-half net profit came in at A$3.4 billion ($3.5 billion), compared with A$3.1 billion a year ago and A$3.24 billion expected by analysts.
The best performed of the major banks, Westpac shares added 1.1 percent in a falling market to take its gains so far this year to more than 25 percent, well ahead of the broader market and its peers.
The bank reported a rise in bad debt provisions, which had fallen sharply for the past three years at all major banks, but have started nudging up as the economy cools, highlighting the challenge ahead for profit growth.
"As with most banks at the moment, revenues are reasonably pedestrian, lending is fairly flat," said Arnhem Investment Management portfolio manager Mark Nathan.
Nathan said bad debt provisions at Westpac and the other large Australian banks -- National Australia Bank, Commonwealth Bank of Australia and Australia and New Zealand Banking Group -- will continue to rise this year as more small and medium-size businesses fail.
"It will be a modest pickup, but enough to impact the only modest growth that the sector is eking out," he said.
Westpac's cash earnings for the year to Sept. 30 rose to A$6.6 billion, marking the third consecutive year of record profit. Cash profit excludes one-offs and non-cash accounting items and is closely watched by investors.
"This is a strong result in a lower-growth economic environment," said Chief Executive Gail Kelly, noting 12 percent growth in deposits and a 4 percent rise in lending.
BAD DEBTS RISING
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.
Last week NAB reported bad debt provisions rose 44 percent to A$2.6 billion, hurt by its loss-making UK unit and the cooling Australian economy.
Westpac said on Monday its full-year impairment charges rose 22 percent to A$1.2 billion as some writebacks in 2011 were not repeated in 2012.
Asset quality improved with stressed assets to total committed exposures falling 31 basis points to 2.17 percent. Bad debt charges as a percentage of average loans edged up to 0.24 percent in the second half, compared with 0.22 percent in the corresponding year-ago period.
Deposit growth expanded at twice the pace of credit growth.
Government figures released last week showed that outstanding housing credit in September rose at the slowest annual pace in at least 35 years as consumers continue to shun debt. Annual growth was 4 percent, down from the double-digit average of the past two decades.
Westpac said its net interest margin, a key measure of core profitability, fell 5 basis points to 2.17 percent, while Tier I capital, a measure of a bank's ability to absorb unforeseen losses, stood at 10.3 percent. (Additional reporting by Lincoln Feast and Narayanan Somasundaram; Editing by Richard Pullin and John Mair)