UPDATE 3-ANZ H1 profit dips on debt costs; shares gain

(Adds analysts comment, share reaction)

By Denny Thomas

SYDNEY, April 23 (Reuters) - Australia and New Zealand Banking Group Ltd (ANZ.AX), Australia's third-ranked lender, posted a 14 percent drop in first-half core profit due to higher bad debt charges and predicted higher levels of new problem loans.

But ANZ shares rose as much as 2.8 percent to A$21.74, ahead of its rivals, as the bank reassured investors its underlying business was on track despite a challenging global environment.

"On face value it looks like it (earnings) hasn't deteriorated further than expectations so the market's breathing a sigh of relief," said Rohan Walsh, investment manager at Karara Capital, which oversees about A$1.2 billion in Australian shares.

ANZ, the first major Australian bank to release earnings in the current reporting period, said revenue momentum had been improving each month, and it had record revenue growth of 12 percent in the first half.

Australian banks are battling tough global credit markets, a slowing domestic economy and risk of rising defaults among Australian corporates. Still, ANZ's profit is in sharp contrast to massive asset writedowns and losses at major global banks.

Rivals National Australia Bank Ltd (NAB.AX) and Westpac Banking Corp (WBC.AX) are expected to announce higher bad debt charges.

"Ignoring the bad and doubtful debt provisions, (ANZ's) underlying business is tracking quite nicely given the turbulent times," said Peter Vann, head of investment research at Constellation Capital Management.

"Other banks will have to have lots of similar issues and they have to come out with some downgrades," he added.

ANZ's October-March cash profit dipped to A$1.67 billion ($1.58 billion) from A$1.94 billion a year earlier, just shy of analyst expectations. Cash profit, effectively core profit stripping out one-offs and non-cash accounting items, forms the basis for dividends.

FIRST DROP IN A DECADE

The result included a more than four-fold jump in bad debt charges to A$980 million -- flagged by the bank earlier this month -- due to ANZ's exposure to a U.S. bond insurer and highly-geared Australian companies, pushing the bank to its first half-year profit decline in about a decade.

Analysts remained cautious about ANZ's credit outlook.

"A lack of surprise should not detract from the disappointment here. While investors may have felt they'd taken their medicine here, we now see past-90-day-due loans up 26 percent," Citigroup said in a note to clients.

By 0118 GMT, ANZ shares were up 2.1 percent at A$21.58, outpacing a 0.6 percent rise on the S&P/ASX 200 index .AXJO.

"The global environment is challenging, and in areas like retail sales, we are seeing early signs of a downturn in our domestic markets," Chief Executive Mike Smith said in a statement. "However, with steps we have taken to strengthen our balance sheet, we are particularly well placed to weather global volatility."

ANZ said it would underwrite its first-half dividend to shore up its capital, raising about A$700 million. The bank, which has been fast expanding into Asia, is one of the two banks left in the fray to acquire Hong Kong's Wing Lung Bank Ltd 0096.HK.

Some analysts have raised concerns that cash-strapped ANZ could struggle to fund its future Asian acquisitions.

"If they come out with a good deal and put it to the market, I don't think they will have a problem raising capital," Vann said.

Australian banks have enjoyed strong credit growth on the back of 16 straight years of expansion, but analysts expect overall loan growth to slow with interest rates rising to a 12-year high of 7.25 percent.

Banks face rising bad debts as many highly-geared local companies such as Centro Property Group (CNP.AX) and Allco Finance Group Ltd AFG.AX struggle to refinance their short-term loans due to rising credit costs.

ANZ said its gross non-performing loans jumped 63 percent to A$1.048 billion.

At Tuesday's close, ANZ shares were down 23 percent in 2008, compared with a 21 percent fall in the seven-stock banking sub-index .AXBAK. (Additional reporting by Ben Wilson) ($1=A$1.06) (Editing by Richard Pullin & Ian Geoghegan)