"(Westpac's result is similar to what) we've seen with the other banks, it is symptomatic of the fact that conditions are increasingly tough for both consumers and businesses in Australia at the moment," said Angus Gluskie, portfolio manager at White Funds Management.
The stock fell as much as 4.2 percent, compared with a 1.3 percent fall in the wider market.
Last year, Westpac and its 'Big Four' bank rivals — National Australia Bank, Commonwealth Bank and Australia and New Zealand Banking Group — posted a record $25 billion in combined profits, in stark contrast to their struggling European and U.S. rivals.
But credit growth has fallen to the lowest level since the 1970s as households increase savings and corporates pay down debt, putting pressure on new business.
Westpac reported a first-quarter cash profit of A$1.5 billion ($1.6 billion) down from A$1.55 billion a year ago. Five analysts on average had expected a first-quarter cash profit of A$1.6 billion.
The result comes as investors worry about higher funding costs, a slow recovery in credit demand and a political backlash against the banks, which have been raising home loan rates despite an easing bias of the central bank.
Australian banks have been cutting costs to offset weaker margins as instability in Europe ups funding costs and domestic loan demand shrinks.
"Operating conditions deteriorated in the December 2011 quarter with slowing global growth and an escalation in the European sovereign debt crisis leading to high market volatility and increased business and consumer caution," Westpac said in a statement.
Westpac said that more recently, easing liquidity conditions in Europe have worked to improve market sentiment but it remained cautious about the outlook.
Westpac recorded a net interest margin that was 10 basis points lower for the quarter compared to the average of third and fourth quarters of 2011, citing higher funding costs and lower treasury earnings as the cause.
The bank said this month it was cutting up to 400 jobs as a way to attack costs and protect profits amid slowing loan growth.
Tier one capital was higher at 9.8 percent and impairment charges were around A$300 million.
Westpac said its loan growth was fully funded by around A$5 billion in customer deposits raised during the quarter.
Westpac announced a restructuring in November, which included the departure of its head of key retail and business banking and the formation of a new division, Australian financial services. It said restructuring program costs were around $200 million.
Despite complaining of slow growth and rising funding costs, CBA reported a record A$3.58 billion half-year cash profit on Wednesday and NAB recorded a strong A$1.4 billion first-quarter profit earlier.
The top four banks raise about $100 billion annually from the wholesale debt markets, primarily from Europe and the United States, to meet a shortfall of deposits to fund lending.
Westpac shares have risen 4.1 percent so far this year, the second-best performer among Australia's 'Big Four' banks behind ANZ, and just below the 4.6 percent rise in the broader index .