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UPDATE 2-Australia's Westpac posts worst half-year profit in six years

Byron Kaye

* Westpac H1 cash profit A$3.30 bln vs A$3.52 bln analyst forecast

* Cash profit down 22 pct on previous year, lowest since 2013

* Dividend unchanged at 94 Australian cents (Recasts on lowest profit in 6 years, adds analyst)

SYDNEY, May 6 (Reuters) - Australia's second biggest lender Westpac Banking Corp posted its lowest half-yearly profit in six years on Monday, missing analyst forecasts, as a shrinking housing market weighed on sales and the bank set aside money to compensate customers.

Cash earnings fell 22 percent to A$3.3 billion ($2.3 billion) for the six months to end-March, its lowest since 2013 and below the A$3.52 billion average estimate of six analysts polled by Reuters. It is the most closely watched measure of bank performance as it strips out unusual items.

"This is a disappointing result reflecting weaker business conditions and the bank dealing decisively with outstanding issues, including remediation and resetting our wealth strategy," Chief Executive Officer Brian Hartzer said in a statement.

The Sydney-based bank expected challenging conditions to continue due to an "uncertain international backdrop" and soft house prices until 2020, Hartzer added.

Westpac, like the other "Big Four" Australian banks, is spending millions of dollars to pay back customers who were charged inappropriate fees and repair its reputation after an inquiry exposed wrongdoing at top financial institutions.

The two-centuries-old lender, which serves over 14 million people, last week flagged a A$617 million hit to half-year profit related to provisions for refunding wronged customers.

Westpac's net interest margin the difference between interest costs and interest earned that measures underlying profitability fell 16 basis points to 2.12 percent in the reported period. Net interest income fell 4 percent.

In August, the lender raised some home loan rates in an effort to preserve its profit margins in the face of higher wholesale funding costs.

But a property downturn and tighter lending conditions after a regulatory crackdown have left banks wrestling for new customers, making it harder to write new loans.

Westpac maintained its interim dividend at A$0.94 a share, declining to follow the lead of No. 4 lender National Australia Bank Ltd which cut its interim dividend for the first time in a decade on May 2.

"There's a lot of noise on remediation but that was to be expected," said Bell Potter banking analyst TS Lim, adding that consensus analyst forecasts may be misleading because of differences in the way people calculated remediation costs.

Morgans Financial Ltd analyst Azib Khan gave a mixed review of Westpac's results, noting that "total income looks a little lower than expected, expenses look a little higher than expected, and the credit impairment charge is lower than expected."

Credit Suisse analysts called it a "necessarily messy result that shows deteriorating operational trends and an outlook that highlights more headwinds to come."

Westpac announced the result before the start of share trading on Monday. ($1 = 1.4325 Australian dollars) (Reporting by Byron Kaye and Paulina Duran in SYDNEY, Rushil Dutta and Aditya Soni in BENGALRU; Editing by Shounak Dasgupta, Peter Cooney and Darren Schuettler)