WRAPUP 1-Asian banks absorb bad debt surge, worse could come

* ANZ unwilling to call end to bad-debt cycle

* South Korea's KB sees bad debt charges falling

* Banks cautious on fragile recovery

* ANZ shares down 2.1 percent, KB Financial drop 2.6 pct

SYDNEY/SEOUL, Oct 29 - Australian and Korean banks gave a reality check on Thursday to investors betting the worst has passed, warning that bad debts could continue to grow even as earnings pick up.

Caution among the region's lenders rocked shares, with Australia's top banks and South Korea's KB Financial Group all down more than 2 percent, compounding a weak lead from U.S. markets overnight.

Bad debt charges rose for all the banks, as expected, and Australia and New Zealand Banking Group was reluctant to call the peak, matching caution at its bigger rival National Australia Bank earlier in the week.

"The management teams are just being circumspect. The clouds just don't blow away," said Marcus Truman, a portfolio manager at Integrity Investment Management in Sydney.

KB Financial, parent company of South Korea's largest bank, Kookmin, was more bullish, saying bad debt provisions would fall next year as fewer loans would go sour.

ANZ Chief Executive Mike Smith warned against complacency, saying although there were positive signs on the economic front in Asia and Australia, there were no real signs of a recovery in the United States.

"This isn't over yet," Smith said. "Often it's the aftershocks that do the most damage."

"We still all need the U.S. economy to kick start."

China's largest bank, ICBC and Bank of China are due to report quarterly results later on Thursday.

KB SLUMP, ANZ JUMP

ANZ, the smallest of Australia's four big banks, and South Korea's third-largest bank, Woori Finance, both pulled out of a trough, reporting strong earnings gains.

ANZ's cash profit surged 79 percent to A$2.43 billion ($2.18 billion) for the half year ended Sept 30, beating analysts' forecasts, bolstered by strong revenue growth from non-interest income in its institutional business.

Still, bad debt charges in the second half surged 29 percent from a year earlier to A$1.63 billion.

In New Zealand, where the bank generates almost a fifth of its revenue, bad debts nearly tripled in the second half from a year earlier.

KB Financial reported a 69 percent drop in quarterly profit to 173.7 billion won ($145 million), much worse than expected, as it was hit by bad debt charges and slow margin recovery.

It is heavily exposed to smaller companies just starting to feel the pain of the economic slump.

Woori, 73 percent owned by the South Korean government, said net profit more than tripled to 483.8 billion won, even as its revenue was halved.