* Big Four banks seen posting record cash profit in FY 2014
* Westpac's cash profit A$7.1 bln in line with consensus
* Westpac final dividend A$0.88 vs A$0.84 a year earlier
* Also issues A$0.10 special dividend
SYDNEY, Nov 4 (Reuters) - Westpac Banking Corp notched up record profits and unveiled a special dividend in a stellar year for Australian banks, and expectations are high that the industry will deliver more earnings growth in 2014.
Tight cost control, signs of a pick-up in credit growth and likely continued drops in bad loans have analysts forecasting a sixth straight year of record combined profits for Australia's Big Four banks to A$28.6 billion, up around five percent from the past financial year.
While there seems little on the horizon to jar with the upbeat tone, the question of just how upbeat may in large part depend on the health of the economy as Australia shifts away from mining-led growth.
"If it's a mild recovery then earnings will bump along and possibly go a bit higher. If it's a strong recovery then obviously the banks will benefit from that," said David Ellis, an analyst at Morningstar.
Australia's economy is expected to grow 2.5 percent this year followed by 2.7 percent in 2014, somewhat slower rates than the 3.6 percent pace in 2012.
Westpac, the country's second-biggest bank by market value, rounded out the banks' annual earnings reports with a cash profit of A$7.1 billion, its fourth year in a row of record earnings and in line with expectations.
Its results were bolstered by a 30 percent fall in bad debts, reflective of a broader trend among the banks which in recent years have seen reduced expenses for non-performing loans become a key contributor to profits.
Westpac also joined Australia and New Zealand Banking Group Ltd, Commonwealth Bank of Australia and National Australia Bank Ltd in rewarding shareholders with dividend hikes.
It lifted its final dividend 5 percent to A$0.88 per share and unveiled a special dividend of A$0.10 per share.
The sector's strong earnings run has come despite some leaner times in bank lending. Annual Australian credit growth stands at 3.3 percent, down from some 15 percent in 2007 while housing credit growth is at around 5 percent, down from 20 percent a decade ago.
But Westpac noted encouraging signs.
"There is no doubt that domestically we are seeing a pick-up in consumer confidence which we expect will translate to a gradual increase in credit growth," Chief Executive Gail Kelly said in a statement.
Michael McCarthy, chief market strategist at CMC Markets, also noted that housing data over the last three months has been positive, boding well for the mortgage market - a key profit centre for Australian banks.
An index for home prices in the country's major cities rose strongly for a second straight month in October to an unprecedented high while parts of Sydney have seen close to record auction clearances. Figures like these have fuelled talk of a housing bubble but the central bank has called such talk "unrealistically alarmist".
Among the banks, National Australia Bank is expected to show the strongest jump in cash earnings in the current financial year - some 5.1 percent to A$6.2 billion, according to an average of three analysts' projections.
ANZ is expected to log a 4.6 percent climb to A$6.8 billion, while Westpac's cash earnings are expected to rise 4.2 percent to A$7.4 billion.
Commonwealth Bank, Australia's biggest bank by market value, is expected to post A$8.1 billion in full-year 2014 cash earnings, up 3.6 percent. On Wednesday, it may report first-quarter cash profit of around A$2.15 billion, up from A$1.85 billion from a year earlier, according to Morningstar's Ellis.
Among the banks, ANZ with its focus on Asia, will be closely watched. With its "super-regional" strategy, ANZ is seeking to position itself as a pan-Asian player like HSBC Holdings Plc and Standard Chartered Plc, aiming to bring in between 25 and 30 percent of earnings from Asia-Pacific, Europe and America by 2017, up from 21.4 percent in its 2013 financial year.
Westpac's shares closed 1.2 percent lower after its earnings, while the broader market was down 0.4 percent. Its shares have jumped by around a third for the year to date.