(Reuters) -Shares of Westpac Banking Corp fell as much as 6% on Monday after a core operating measure worsened in the first quarter despite an overall increase in profit helped by a drop in bad loans and growth in lending volumes.

Australia's No. 2 mortgage lender posted an unaudited net profit of A$1.7 billion ($1.08 billion) for the three months ended December 31, compared with A$1.5 billion posted a year earlier.

However, based on the bank's average quarterly performance in the second half of 2024, profit was down 9%, reflecting trends in hedge accounting.

The lender's core net interest margin - the difference between interest earned from lending and paid for deposits - fell 2 basis points from the second half of last year to 1.81%.

"The modest decline reflects prudent management in the context of ongoing mortgage competition and further deposit mix shift towards lower spread savings and term deposits," it said in a statement.

The bank's common equity tier 1 ratio, an indicator of spare cash, was 11.9% at the end of the quarter, compared with 12.3% at the end of the same period last year.

By 0051 GMT, shares of Australia's oldest bank were down 4.8% at A$33.04. The financial sub-index was down 2% ahead of a widely-expected quarter-point interest rate cut by the Reserve Bank of Australia on Tuesday, its first in more than four years.

A high interest rate environment typically boosts bank profits and rate cuts can put pressure on their margins, challenging profitability even if lending and credit quality improve.

"Cost-of-living pressures and high interest rates remain challenging for some customers while many businesses face cost pressures and lower demand," Chief Executive Anthony Miller said in a statement.

He added that lower interest rates should provide some relief to households and support business activity over time.

Westpac said its domestic housing loans grew 2% during the period and business loans grew 3%.

The ratio of loan repayments more than 90 days late to the bank's total loans stood at 1.03% at the end of December, down by 9 basis points from the end of September.

($1 = 1.5748 Australian dollars)