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* Westpac H1 cash profit A$3.30 bln vs A$3.52 bln analyst view
* Cash profit down 22 pct on previous year, lowest since 2013
* Dividend unchanged at 94 Australian cents
* Big Four 1H19 cash profit down 4 pct at A$14.5 bln -KPMG (Adds shares, Big Four 1H19 earnings 4 pct lower)
SYDNEY, May 6 (Reuters) - Australia's second-biggest lender Westpac Banking Corp posted its lowest half-year profit since 2013 on Monday, as interest income shrank along with the housing market, and costs rose as the bank compensated customers for botched service.
The result comes as the country's four biggest lenders, which dominate about 80 percent of the consumer and commercial banking market, grapple with record-low mortgage demand after regulators responded to a property-price boom with lending caps.
At the same time, the "Big Four" are spending millions of dollars refunding customers and repairing reputations after a government-ordered inquiry into financial sector business practices exposed widespread wrongdoing.
"Regulatory activity is intense, economic growth has slowed, consumer and business demand has softened, house prices have fallen and competition has increased," Chief Executive Officer Brian Hartzer said at an earnings presentation.
"All these have put pressure on earnings and given us a list of issues to manage."
Westpac's result rounds up a downward trend in profitability at the Big Four, which also includes Commonwealth Bank of Australia, Australia and New Zealand Banking Group Ltd and National Australia Bank Ltd (NAB).
The four reported a combined cash profit of A$14.5 billion for the first half of each financial year, down 4 percent from the same period a year prior, showed data from KPMG.
At Westpac, cash profit fell 22 percent in October-March to A$3.3 billion ($2.3 billion), versus the A$3.52 billion average estimate of six analysts polled by Reuters. Cash profit is a closely watched measure of 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," Hartzer said in a statement.
The two-centuries-old lender, which serves over 14 million people, last week flagged a A$617 million hit to half-year earnings related to refunding fees inappropriately charged, such as for financial advice not rendered. The bank has since ceased offering financial advice.
"House prices are likely to remain soft and home building is set to reduce through 2019 and into 2020," Hartzer said. Westpac expects housing credit to slow to 2.5 percent in its next financial year from a record-low 4 percent at present, he said.
Westpac said its net interest margin the difference between interest paid and interest earned, measuring underlying profitability fell 16 basis points to 2.12 percent in October-March. Net interest income fell 4 percent.
In August, Westpac raised some home loan interest rates to preserve profit margins in the face of higher costs. But the property downturn and tighter lending conditions have left banks wrestling for customers, making it harder to write new loans.
Though maintaining a low level of stressed exposure and impairment charges, Westpac also reported a 21 percent spike in properties in possession to 482 - about 0.31 percent of total loans.
Westpac shares were 1.6 percent lower in afternoon trade, compared with a 0.9 percent fall in the broader market.
The lender maintained its interim dividend at A$0.94 a share, declining to follow the lead of NAB, the fourth-biggest lender, which cut its interim dividend for the first time in a decade on May 2.
($1 = 1.4325 Australian dollars)
(Reporting by Byron Kaye and Paulina Duran in SYDNEY, and Rushil Dutta and Aditya Soni in BENGALRU; Editing by Darren Schuettler and Christopher Cushing)