UPDATE 2-Australia's Westpac says bad debts have peaked

* Westpac outlook the most confident of local banks

* Says peak of bad debt cycle reached

* H2 cash profit falls 10.5 pct, result above forecast

* Says not actively scanning for acquisitions (Adds details on credit and capital, analyst and fund manager quotes)

By Morag MacKinnon

SYDNEY, Nov 4 (Reuters) - Westpac Banking Corp (WBC.AX), Australia's third-biggest lender, forecast a fall in bad debts next year, marking the local banking industry's most confident outlook to date, even as it reported a fall in profits.

Westpac on Wednesday posted a 10.5 percent fall in second-half cash profit, hurt by higher bad-debt charges, but the result came in just above the top of market forecasts and contained an outlook that was far less cautious than its rivals.

"They're a little bit more definitive (than previously) in their statement suggesting that the bad and doubtful debt cycle has probably peaked," said Paul Xiradis, head of Ausbil Dexia in Sydney, which has A$10 billion in funds under management.

Westpac made a cash profit of A$2.332 billion ($2.11 billion) for the six months ended Sept 30, compared with a pro forma A$2.605 billion a year earlier. The year-ago figure was adjusted to include earnings from the recently acquired St George bank.