Reuters Finance News, Australia

(Adds analysts' comments)

By Sonali Paul

MELBOURNE, May 9 (Reuters) - National Australia Bank Ltd (ASX: NAB.ax) , the nation's top lender by assets, reported an 8 percent rise in first-half profit, helped by business lending growth and cost cuts, but warned that credit growth was slowing.

Australian banks have largely dodged the sub-prime woes afflicting global banks, but the credit crunch has raised their funding costs while their customers are feeling the pinch of higher interest rates.

NAB increased its charge for bad and doubtful debts by 86 percent to A$726 million ($685 million), joining its Australian rivals in setting aside funds against clients facing tougher times.

Chief Executive John Stewart said on Friday underlying asset quality remained sound, but analysts were more skeptical.

"It doesn't look very strong if your bad debt charge is almost A$1 billion," said Wilson HTM analyst Brett Le Mesurier, adding that the charge was a bit higher than he had expected.

NAB, the last of the country's top four banks to report its half-year results, said credit growth was slowing in New Zealand and Britain, where it owns Yorkshire Bank and Clydesdale Bank, but remained stronger in Australia.

"Further slowing in system lending is expected in all three markets, but this has been long expected, as lending growth has been particularly high in all three economies through recent years," NAB said.

Cash earnings rose to A$2.237 billion for the six months to March from A$2.071 billion a year ago, and about 1 percent above analysts' forecasts.

Cash earnings, which strip out one-offs and non-cash accounting items, form the basis for dividends.

BAD DEBT CHARGES

NAB, a margin lender to troubled Australian asset manager Allco Finance Group AFG.AX, said the increased charges for bad and doubtful debts were mostly being held for a small number of corporate customers.

Australia and New Zealand Banking Group Ltd (ASX: ANZ.ax) last month quadrupled its bad debt charges to A$980 million, while Westpac Banking Corp (ASX: WBC.ax) , considered the most conservative of Australia's banks, booked charges of A$433 million, up 87 percent on a year ago.

As flagged in March, NAB booked a profit of A$225 million from its stake in the float of Visa V.N.

To shore up its capital position, the group said it would underwrite any shortfall in participation in its dividend reinvestment plan to 100 percent.

NAB reported operating expenses fell 3 percent to A$3.6 billion, and reaffirmed it would hold cost growth below inflation through September 2010.

"The 3 percent operating expense decline is quite surprising. This is really low. The question is, is this sustainable," said an analyst who declined to be identified due to company policy.

Funding costs increased by A$131 million for the group.

Australian banking earnings grew 17 percent to A$1.37 billion, spurred by business and corporate lending. Cash earnings in the UK rose 5.8 percent to A$311 million. In sterling, UK earnings grew 18 percent.

Net interest margin, a key measure of profitability, fell 15 basis points to 2.18, as funding costs increased. NAB shares have fallen about 18 percent so far this year against a 10 percent fall in the broader market .AXJO, and are trading at 10.4 times forecast 2008 earnings, lower than the bank's three main rivals. ($1=A$1.06) (Editing by Jonathan Standing)