Reuters Finance News, Australia

(Adds CEO comments, updates shares)

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 and, to the market's relief, had no big problems in the UK, sending its shares up 6 percent.

With NAB's shares priced for bad news ahead of the result, Chief Executive John Stewart stressed on Friday the bank had shored up its capital buffer and was avoiding risky loans to ensure it could weather slower credit growth and rocky financial markets.

"The future's uncertain. We're hoping for the best. But, quite frankly, we're planning for the worst," Stewart said.

The overall result was in line with market forecasts, but analysts had raised concern that with UK banks taking big writedowns and facing shrinking mortgage margins, NAB's Yorkshire Bank and Clydesdale Bank could suffer. NAB made around 14 percent of its earnings from the UK.

"Not blowing up is probably not a bad outcome," said Rohan Walsh, an investment manager at Karara Capital.

Australian banks have largely dodged the subprime woes afflicting global banks, but the credit crunch has raised their funding costs while their customers are feeling the pinch of higher interest rates and higher food and petrol prices.

"I think the crisis in the debt market might be over," Stewart told reporters, but said the recovery would be long and bumpy, running possibly into 2010.

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 trouble.

Stewart said underlying asset quality remained sound, but analysts said the bad debt charge was slightly higher than expected.

"It doesn't look very strong if your bad debt charge is almost A$1 billion," said Wilson HTM analyst Brett Le Mesurier.

NAB said credit growth was slowing in New Zealand and Britain but remained strong in Australia.

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.

NAB's Australian business lending grew 16 percent to A$92 billion, while deposits grew 13 percent to A$105 billion.

The group's net interest margin fell 15 basis points to 2.18 percent.

NAB shares rose as high as A$32.95 and last traded up 5.8 percent at A$32.81, outpacing gains between 1 percent and 3.4 percent in its main rivals.

BAD DEBT CHARGES

"The UK side hasn't exploded. Cost control was pretty good. Margin performance didn't look too bad. Revenues look ok. Bad debt was a bit higher than expected," said Karara's Walsh.

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.

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 said operating expenses fell 3 percent to A$3.6 billion, helped by moving some back office jobs to India. It reaffirmed it would hold cost growth at or below inflation through September 2010.

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. ($1=A$1.06) (Additional reporting by Ben Wilson) (Editing by Louise Heavens & Kim Coghill)