* First-half profit up 8 pct year-on-year
* Bad debt costs down by 14 pct
* Declares special dividend of 708 cents
* Shares fall 5.6 percent
By Helen Nyambura-Mwaura
JOHANNESBURG, July 30 (Reuters) - Absa Group, theSouth African bank majority owned by Britain's Barclays Plc, posted a small rise in first-half earnings on Tuesdayand warned loan growth would be muted for the rest of the year.
South Africa's third-largest bank by market value alsodisappointed shareholders with a lower-than-expected specialdividend. Shares of Absa tumbled 5.6 percent to 143.15 randafter the results.
Absa, the first of South Africa's "big four" banks to reportearnings, said profit rose 8 percent year-on-year as bad debtsdeclined, raising concerns among investors that underlyinggrowth is weak.
"Certainly, the headline earnings growth of 8 percent is notfantastic. If one looks at the source of the earnings, a lot ofit has got to do with cost savings," said Reuben Beelders, chiefinvestment officer of Gryphon Asset Management in Cape Town.
"The bulk of the kick in earnings is really just theimproved credit impairment (bad debt) scenario, and the marketis basically saying, 'That's not really growth.'"
Demand for credit in South Africa has stayed weak as thecountry struggles to jump start economic activity. The centralbank downgraded its economic growth forecast this month to 2percent from 2.4 percent, and latest private-sector creditstatistics show demand is contracting slightly.
Absa said it expected "mid-single digit" growth in loans andadvances to customers in 2013. In the first six months, thegrowth was 7 percent, and net interest income increased by 5percent to 12.5 billion rand ($1.3 billion).
Its bad debt costs fell 14 percent to 3.5 billion rand inthe first half and the lender expects them to shrink furtherfrom last year's levels.
Absa, which said in February it was planning to returnexcess capital to shareholders, paid a special dividend of 708cents per share, below the 750 cents the market had expected.
"The dividend is light," said Stephen Burrell, a trader atAvior Research.
CEO: GROWTH CHALLENGING
"We are committed to improving our top line income thisyear," Chief Executive Maria Ramos said in a presentation toanalysts. "Our growth remains challenging."
With interest rates at the lowest in decades, other SouthAfrican banks have made an aggressive push into unsecuredlending - loans not backed by collateral - raising concernsamong regulators and analysts that some loans could sour ashousehold debt levels rise.
Absa has shied away from the riskier personal loans segmentand CEO Ramos said that decision had cost it some business.
The bank said headline earnings per share, the main gauge ofprofit in South Africa, rose to 649 cents from a restated 599.6cents a year earlier.
It also declared an interim dividend of 350 cents inaddition to the special dividend.
South Africa's No.4 bank Nedbank is scheduled toreport on Aug. 6 and industry leader Standard Bank aweek later on Aug. 15.
Absa will start trading in Johannesburg as Barclays Africalater this week after taking over its parent's Africanbusinesses following a 18.2 billion rand deal comprising theissue of 129.5 million shares to Barclays.
Shares of Absa have fallen 12 percent this year,underperforming a 7 percent drop in Johannesburg's index ofbanks.
Barclays (BARC)