With all the talk about how times are tough for the banks, what’s the damage with the National Australia Bank in the March 31 half year? A small 9.4% fall in cash earnings, despite sharply high provisions. In fact the bank reported that its cash earnings actually rose 7.5% in Australia.

So much for all the worrisome commentary from analysts and the others: at least our banks are producing earnings from recurring businesses, including bad debts.

Total net profit dropped to $2.66 billion in the six months to March 31, from $2.69 billion in the first half of the previous year. Cash earnings, which excludes gains from currency and interest rate movements on the bank’s debt, fell 9.4% to $2 billion.

If the NAB is any guide, our big banks are raking in money hand over fist with the problem areas of the banks’ own making. These include injudicious and dud loans to the Allcos, ABC Learning, Centro and other dodgy companies.

The NAB’s earnings were of a much higher quality than any of the big US banks that reported profits for the first quarter last week (JPMorgan, Goldman Sachs, Citigroup and Wells Fargo).

Banks in the US, UK, Germany and Japan are incurring losses or making money out of trading operations as they borrow cheaply from the US Federal Reserve’s funding programs and lend it out at higher rates for mortgage refinancings, corporate loans and other deals.

The small fall in cash earnings came despite a 64% plunge in profits from the bank’s UK operations, and a 50% rise in bad debt provisions from $1.2 billion to $3.6 billion in the six months to the end of March.

The half year profit decline was directly attributed to an increase of $1.1 billion in the overall bad loan charge to NAB’s accounts — a figure that now stands at $1.8 billion.

NAB has now set aside $4.9 billion to cover bad and doubtful debts over the last year as the domestic economy has slumped towards a recession. The bank said in the statement that the increase in provisions reflected “a downgrade in customer credit ratings across all businesses.”

That figure contains a $500 million jump in specific bad loans to $1.3 billion and that is spread across all of NAB’s different businesses in Australia, New Zealand, the UK and — to a lesser extent — in the US.

“The fall in cash earnings reflects the tough economic conditions that continued to deteriorate as the half year progressed,” CEO Cameron Clyne said in the statement.

“We continued to grow revenue while carefully managing costs, but this was offset by increased bad and doubtful debts and higher funding costs.”

In Australia, bank cash earnings rose 7.5%, while earnings at its MLC unit dropped 28%. In the UK the Clydesdale Bank Plc and Yorkshire Bank Plc saw cash earnings tumble 64% as the British banking sector came under enormous pressure. Strip out the MLC figures and the results are looking rosy indeed.

The Bank said “the Australian region grew total revenue by 9.6% with both business and retail banking recording double digit revenue growth although this was partially offset by lower wealth management revenue due to weak investment markets.

“Australia Banking cash earnings increased by 7.5% to $1.5 billion compared with the March 2008 half year. Business & Private Banking and Retail Banking both contributed. Business & Private Banking was up 7.1% to $1.0 billion and Retail Banking was up 8.6% to $0.5 billion. Revenue was 13.9% higher at $4.4 billion while expenses increased by 4.4% to $1.7 billion.”

Those are the figures of a bank sailing through a recession. It may get worse, but the NAB has enough fat and earnings to ride out any storm.

NAB shares were trading down 26 cents at $21.78 around 11.40am today. That’s a silly reaction: the result was in line with analysts’ expectations and much stronger than anyone would have believed had you listened to the doom and gloom merchants up to a month or so ago.