UPDATE 3-Australia's Westpac says bad debts have peaked

* Westpac says peak of bad-debt cycle reached

* H2 cash profit falls 10.5 pct, result above forecast

* Shares gain by as much as 2.6 percent

* Says not actively scanning for acquisitions (Recasts lead, adds graphic link, details)

By Morag MacKinnon

SYDNEY, Nov 4 (Reuters) - Westpac Banking Corp (WBC.AX), Australia's third-biggest lender, gave a brighter outlook for bad debts than its rivals on Wednesday, saying the worst was over and vindicating market expectations for healthy growth ahead.

The bank posted a 10.5 percent fall in second-half cash profit, hurt by higher bad-debt charges, but its result narrowly beat the top of market forecasts and contained an outlook that was more confident than its major competitors.

"We are right now at the top of the credit cycle," Chief Financial Officer Phil Coffey told reporters.

Westpac's relative optimism on bad debts is due to its greater presence in the stable home-lending market.

In contrast, National Australia Bank (NAB) (NAB.AX) is more exposed to the troubled local business-lending market and Australia and New Zealand Banking Group Ltd (ANZ.AX) (ANZ) has the biggest stake in recession-hit New Zealand.

Both banks warned recently that bad debts had yet to peak.

Paul Xiradis, head of Ausbil Dexia in Sydney, which has A$10 billion under management, said Westpac appeared more confident now, compared with its previous outlooks.

"They're a little bit more definitive in their statement suggesting that the bad and doubtful debt cycle has probably peaked," Xiradis said.

Westpac shares jumped 2.6 percent in early trade before easing back to A$25.62, up 0.8 percent in a weak overall market.

Last week, NAB and ANZ issued solid profit results, also beating market forecasts, with NAB saying that bad debts would take another 6 to 12 months to peak.

Australian bank shares have rallied strongly this year, at more than double the pace of the wider market, as earlier fears of recession and a funding crisis proved to be unfounded.