By Archishma Iyer

(Reuters) -Westpac Banking Corp, Australia's third largest lender by market value, said on Monday that its annual profit fell as expenses stemming from a technology upgrade blew out, sending its shares lower.

The stock fell as much as 2.5% to A$31.30, as of 2350 GMT, and was set for its worst session since Sept. 24 - if current losses held.

Technology investments, software amortization, and inflationary pressures across all business segments led to the rise in costs, with full-year operating expenses reaching A$10.94 billion ($7.21 billion).

Net interest margin (NIM ) - a key measure of profitability - improved to 1.97% in the second half of the fiscal year from 1.89% in the first six months, even as competition in mortgage pricing persisted.

This prompted Westpac to increase its buyback programme by A$1 billion and hike its annual dividend payout, although that did not impress investors.

"The underlying NIM trends we think look encouraging, although a period of higher-than-expected cost growth might dampen some of this benefit," UBS analysts said in a note.

Westpac's profit declined 3% for the year ended Sept. 30 to A$6.99 billion, but that was above an LSEG estimate of A$6.50 billion.

The bank said it expected solid demand for housing and business credit in 2025, as the country's central bank looked to shift to an easing stance.

"Some central banks have shifted to an easing cycle and the RBA is likely to follow in 2025. This will be good news for many households and businesses," Westpac said in a statement.

Elevated interest rates, which lead to high mortgage repayment costs for borrowers and intensify competition, are pushing Australian retail banks to diversify their revenue streams beyond their traditional focus on home loans.

Westpac declared a final dividend of 76 Australian cents per share, compared with 72 Australian cents a year earlier.

($1 = 1.5177 Australian dollars)

(Reporting by Archishma Iyer and John Biju in Bengaluru; Editing by Chris Reese and Subhranshu Sahu)