REFILE-UPDATE 2-Commonwealth Bank says bad debts have peaked

* Q1 cash earnings A$1.4 bln

* Says bad-debt cycle has peaked

* Australian wealth and retail drives earnings

* Says pace and extent of economic recovery remain unclear

* Shares up 3.9 percent (Refiles to fix typo in second bullet point)

By Morag MacKinnon

SYDNEY, Nov 9 (Reuters) - Commonwealth Bank of Australia Ltd (CBA) (CBA.AX), the nation's second-biggest lender, gave a brighter-than-expected outlook for bad debts, renewing hopes that the asset quality of banks is improving.

CBA, the country's largest mortgage lender, also reported across-the-board improvements in all divisions in its first-quarter trading update on Monday. CBA shares rose as much as 4.7 percent following the announcement and were trading 3.9 percent higher at A$54.74 by mid-afternoon.

"It's confirmation that asset quality has stopped deteriorating for them and is most likely improving," said Brett Le Mesurier, an analyst at Axiom Equities in Sydney.

CBA's comments on the bad-debt cycle peaking echoed similar views last week by Westpac Banking Corp (WBC.AX). CBA and Westpac dominate the home mortgage market in Australia.

The other two lenders in Australia's 'Big Four' -- National Australia Bank (NAB.AX) and Australia and New Zealand Banking Group (ANZ.AX) -- however, have been less definitive that the worst of bad debts is over.

NAB, ANZ and Westpac reported better-than-expected profits in the past two weeks.

CBA said bad-debt charges were about A$700 million for the quarter, with credit quality trends "generally moving in line with expectations".

"We've humped over the head and we're sitting on the shoulder of our loan impairment expense," Chief Financial Officer David Craig said at a media briefing.

The outlook for the Australian economy has improved markedly in recent months as robust consumer confidence and strong demand from China for resources drive growth.

The central bank last week sharply upgraded its forecasts of economic growth for next year and has increased the benchmark interest rate by 50 basis points in two moves, setting it apart from most other developed nations which still have rates at or near historic lows.