Commonwealth, Westpac seen raising up to A$3.5 bln

By Mette Fraende

SYDNEY, Dec 3 (Reuters) - Commonwealth Bank of Australia (CBA.AX) and Westpac Banking Corp (WBC.AX) are expected to raise up to A$3.5 billion ($2.3 billion), possibly before Christmas, as they prepare for rising bad debts in a slowing global economy.

Australia's banks, which have escaped the worst of the subprime mortgage fallout battering U.S. and European peers, may also cut dividends at some time as they look to preserve capital, some analysts said.

Commonwealth, the No.2 lender, is seen as first in line, raising A$1-A$1.5 billion ($644-$966 million), possibly this month.

"If there's a bit of a Christmas cheer rally, it could happen in December," said Jarrod Martin, banking analyst at ABN AMRO.

Fourth-ranked Westpac, which recently bought St George Bank in a deal worth around A$12 billion, is expected to raise A$1.5-A$2 billion ($966 million to $1.29 billion).

"St George is relatively underprovisioned compared with Westpac, so if you bring St George up to Westpac standards, they need some capital," said a banking analyst with an international stock broker, asking not to be named due to corporate policy.

Last month, Commonwealth warned investors to expect a big jump in bad debts, a few days after top lender National Australia Bank (NAB.AX) said it was raising A$3 billion to strengthen its balance sheet.

Shares in Commonwealth and NAB have fallen about 50 percent this year, against a 45 percent drop on Australia's benchmark stock index .AXJO.

DIVIDEND CUTS LURKING

Further capital raisings and/or dividend cuts would be required to ensure Tier 1 capital remains above 8 percent for Commonwealth and Westpac, ABN AMRO said in a banking report, adding the banks' bad debts would peak in 2010.

"We believe that from a capital preservation and economic perspective, the best avenue would be for the banks to cut their dividends," said ABN AMRO.

While it would be too pessimistic to bet on cutting dividends at this point, cuts were inevitable, the unnamed banking analyst said.

"It sort of has to happen at some point in time, given how their capital situation is developing, and given how provisioning is going to evolve."

But dividend cuts would be the banks' least preferred solution, said Angus Gluskie, portfolio manager at White Funds management.

"They would only do it if they were pressured by an unexpectedly high level of bad debts. It's not impossible ... but they will do what they can to be able to keep dividends at existing levels," he said.

Third-ranked Australia and New Zealand Banking Group (ANZ.AX) has recently underwritten its dividend reinvestment program, getting the bank to a Tier 1 ratio of 8.1 percent, making NAB and ANZ less likely to raise capital, said ABN AMRO's Martin. (Editing by Dhara Ranasinghe & Ian Geoghegan)