Published: Tuesday, 27 Oct 2009 | 8:13 PM ET

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National Australia Bank, Australia's largest lender, pledged on Wednesday to manage its balance sheet conservatively, dampening down any hopes that the bank would return some surplus capital to investors.

The bank made the comment despite reporting an 8 percent rise in second-half earnings, toward the top of market forecasts. Bad debt charges jumped but were also within expectations.

"The bottom line is, you are not going to get a share buy-back from one of these companies until they are sure about the future," said Chris Weston, institutional dealer at IG Markets.

Australia's major banks are sitting on an estimated A$20 billion ($18.4 billion) in surplus capital after raising equity to withstand an economic downturn that has been shallower and shorter than feared.

Most analysts have told investors not to bank on a return of capital, but there has been persistent talk that NAB and its three major rivals could be persuaded to return some cash.

NAB's tier one capital-adequacy ratio climbed 65 basis points to 8.96 percent at Sept. 30, above regulatory requirements, but Chief Executive Cameron Clyne said this cushion was necessary to deal with a still-uncertain environment.

"Whilst we've landed at 8.96 percent for this half we can see a range of headwinds that could see us quite quickly settling around 8.5," Clyne told a media briefing.

"That's why it's important for us to be strong on capital to give us a buffer against those potential headwinds."

The bank gave a cautious outlook in its results statement, which showed that bad-debt charges surged 14 percent to A$2 billion for the second half from A$1.76 billion a year earlier.

Cash profit rose to A$1.81 billion from A$1.68 billion a year earlier. The mean forecast of eight analysts surveyed by Reuters was for a cash profit of A$1.74 billion, with the forecasts ranging between A$1.53 billion and A$1.93 billion.

The bank gave no specific earnings guidance for the current fiscal year, saying it would focus on cutting costs.

"I think the result will actually be taken positively," said Shaw Stockbroking senior dealer Jamie Spiteri, noting the bank's higher-than-expected final dividend of 73 cents a share.

"Going forward it's not the bad debts which are going to impact growth, it's the revenue line which is the driver," he said.

NAB shares, which closed at A$30.70 on Tuesday, have risen 47 percent this year on optimism the bank may have seen the worst of the credit crunch and as pressure on net interest margins is expected to ease.

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