(Reuters) -Commonwealth Bank of Australia, the country's biggest lender, reported a smaller-than-expected drop in annual cash profit on Wednesday and declared its highest-ever dividend, despite a dip in margins and rise in overdue home loan payments.

The cash profit came in at A$9.84 billion ($6.52 billion) for the year ended June 30, ahead of an LSEG estimate of A$9.68 billion, but was around 3% below the record A$10.16 billion posted the prior year.

CBA, which writes around a quarter of the country's mortgages, also declared a final dividend of A$2.50 per share, its highest ever, compared with A$2.40 Visible Alpha consensus.

Shares of Australia's top company by market capitalisation were trading 0.4% higher at A$133.00 as at 0034 GMT after rising as much as 1% during early trading.

The lender's shares have already risen nearly 5% since the start of July, reaching an all-time high of A$138.24 on Aug. 1.

Loan volume growth with relatively stable margins supported the earnings, but intense competition kept the pressure on as a double whammy of sticky inflation and high interest rates weighed on households' spending power and their loan payment capacity.

"Many Australians continue to be challenged by cost of living pressures and a fall in real household disposable income," the bank said in a statement.

"Consumer arrears increased reflecting the impact of higher interest rates and cost of living pressures on some borrowers."

Home loan payments past due for 90 or more days were at 0.65% of its total mortgages at the end of June, an increase of 13 basis points from December-end.

The bank's net interest margin (NIM), a closely watched measure of the difference between interest earned from loans and interest paid on deposits, fell 8 basis points to 1.99%. However, it beat the consensus of 1.97% and was higher in the second half than in the first half.

Citi analysts said the consensus for a NIM of 1.95% for the current half ending Dec. 31 might be "too pessimistic".

Azib Khan, executive director at E&P Financial, said he expected higher NIM to potentially prompt an earnings consensus upgrade of 3% to 6% for the current financial year and the following year.

Despite the solid result, CBA warned high interest rates were affecting the economy and reducing household disposable incomes and demand, with a huge impact still being absorbed even though inflation was moderating.

"Australia remains well positioned but downside risks continue around productivity, housing affordability, as well as ongoing global uncertainty," CEO Matt Comyn said in the annual results report.

($1 = 1.5081 Australian dollars)

(Reporting by Sameer Manekar and Roushni Nair in Bengaluru; Editing by Anil D'Silva and Jamie Freed)