SYDNEY (Reuters) -National Australia Bank, the country's biggest business lender, said on Wednesday that first-quarter profit slipped as competition for customers ate into margins and more borrowers fell behind on repayments, sending its shares tumbling.

The result amounts to what Australian banks hope is the end of a tough period dominated by rising arrears and margin sacrifices to win inflation-weary customers after interest rates rose 13 times since 2022 to the highest level in 13 years.

Australia's central bank announced its first rate cut in five years on Tuesday, a relief for borrowers but too late for this earnings season.

The country's top lender Commonwealth Bank of Australia grew its net interest margin but warned of strain on borrowers from high living costs, while Westpac's margin shrank in results announcements this month.

For Melbourne-headquartered NAB, which is also Australia's third-largest mortgage lender, cash profit was A$1.74 billion ($1.11 billion) for the quarter ending December 31, marginally behind the Visible Alpha consensus estimate of A$1.77 billion and down from A$1.80 billion a year earlier.

NAB said total assets that were impaired or in default hit the highest in at least two years as a proportion of overall loans, while a deterioration in its business lending book prompted it to raise its total impairment charge to the highest in the same period.

"The economic outlook is improving but cost of living and interest rate challenges persisted during 1Q25," NAB CEO Andrew Irvine said in a statement.

Shares of NAB fell as much as 8% in early trading before settling down 7% by mid-session on Wednesday, their biggest intraday decline in five years, helping to drag the broader index down 0.8%.

"Non-performing loan trends and mortgage arrears look slightly worse than peers," Citi analysts wrote in a note.

"NAB's balance sheet mix skewed towards business potentially leaves it more exposed to heightened deposit & funding competition in that area of the market."

NAB said in its limited quarterly update that it experienced "a small decline in net interest margin" - a key measure of profitability - in the period due to higher funding costs and competition, without giving a figure.

Expenses during the quarter rose 2% mainly due to higher personnel and financial crime-related costs, along with increased technology spend, the company said.

ANZ Group, the last of Australia's "Big Four" banks to report financial results in the current round, will give a quarterly update on Thursday.

($1 = 1.5743 Australian dollars)