* Commonwealth Bank H1 record interim profit of A$4.27 bln, up 14 pct
* Bad debt expenses down 26 pct
* Analysts expect record annual profit of A$8.76 bln (Adds company and analyst comments, details of results)
By Byron Kaye
Sydney, Feb 12 Commonwealth Bank of Australia, , the country's biggest lender by market value, reported a record interim profit on Wednesday as a reduction in bad debts and growth in its loan book overcame narrowing margins.
CBA reported cash net profit of A$4.27 billion ($3.86 billion) for the six months to Dec. 31, up 14 percent from A$3.75 billion last year and better than analyst forecasts. The previous interim result of A$3.78 billion was restated for continuity, CBA said.
CBA shares were flat in morning deals after the results.
The bank reported a 26 percent decline in loan impairment expense, following rival Australia and New Zealand Banking Group Ltd's forecast a day earlier of a 10 percent fall in annual bad debt exposure.
Analysts predict the country's four major banks will post a sixth consecutive year of record profits with combined earnings rising more than 5 percent, thanks to tighter cost controls, less exposure to bad debt and a booming property market. Other banks report half-yearly results in May.
CBA said its loan impairment expense fell to A$457 million for the six months to Dec. 31, from A$616 million a year earlier.
"It's similar to ANZ, asset quality is still improving," said Bell Potter banking analyst TS Lim.
Analysts polled by Thomson Reuters I/B/E/S had, on average, expected CBA to post earnings of A$4.15 billion. Cash earnings, which exclude one-offs and non-cash accounting items, are closely watched by investors.
The result puts CBA on track to reach analysts' forecast net profit of A$8.76 billion for the full year, which would be a record. But CBA gave a subdued forecast of economic conditions, with chief executive officer Ian Narev saying volatility in global markets was suppressing business confidence.
"There is little real evidence, so far, of a meaningful increase in investment in the rest of the non-resource sector of the Australian economy, other than in housing," Narev said.
"We continue to assume that any improvements in economic activity in the next year will be gradual rather than dramatic."
The bank's overall net interest income grew by 8 percent to A$7.44 billion. But it said its net interest margin shrank from the prior six months because of competition and lower cash rates.
It declared an interim dividend of A$1.83 fully franked, up 12 percent on the prior interim dividend. ($1 = 1.1072 Australian dollars) (Reporting by Byron Kaye; Editing by John Mair)