REFILE-UPDATE 2-Commonwealth Bank says bad debts have peaked

* Q1 cash earnings A$1.4 bln

* Says bad-debt cycle has peaked

* Australian wealth and retail drives earnings

* Says pace and extent of economic recovery remain unclear

* Shares up 3.9 percent (Refiles to fix typo in second bullet point)

By Morag MacKinnon

SYDNEY, Nov 9 (Reuters) - Commonwealth Bank of Australia Ltd (CBA) (CBA.AX: Quote, Profile, Research), the nation's second-biggest lender, gave a brighter-than-expected outlook for bad debts, renewing hopes that the asset quality of banks is improving.

CBA, the country's largest mortgage lender, also reported across-the-board improvements in all divisions in its first-quarter trading update on Monday. CBA shares rose as much as 4.7 percent following the announcement and were trading 3.9 percent higher at A$54.74 by mid-afternoon.

"It's confirmation that asset quality has stopped deteriorating for them and is most likely improving," said Brett Le Mesurier, an analyst at Axiom Equities in Sydney.