* CBA misses expectations with A$4.68 bln cash profit, up 1.7 pct
* Home loan growth offset by higher funding costs, lower fees
* Most line items looked disappointing - Deutsche Bank (DE:DBKGn) analyst
* Shares fall 2 pct, following Tuesday's post-inquiry rally (Adds quotes, analysis, increase in bad debt charges, shares fall)
By Paulina Duran and Byron Kaye
SYDNEY, Feb 6 (Reuters) - Commonwealth Bank of Australia CBA.AX , the country's biggest lender, posted a weaker than expected first-half profit on Wednesday as rising costs and fierce competition for mortgages squeezed its margins, sending its shares down sharply.
The result reflects the pincer action that is putting a brake on profit growth in Australian banks: global market turmoil is making it more expensive for them to borrow money, while a housing downturn spurs competition for new customers.
On top of that, a regulatory crackdown fuelled by a year-long misconduct inquiry has put pressure on banks to be more careful writing loans. The inquiry's final report, published on Monday, recommended regulators consider prosecutions for 24 misconduct cases which may include CBA.
Unaudited cash profit for the six months to end-December rose 1.7 percent to A$4.68 billion ($3.4 billion) for Australia's second-largest company, less than the A$4.78 billion average estimate of nine analysts polled by Reuters.
Home loans, the main earnings generator for Australian banks, grew about 4 percent in the half but funding costs grew more, even though CBA added an extra 0.15 percentage points to mortgages over the benchmark rate.
"We certainly have some headwinds from margins," said CEO Matt Comyn on an analyst call.
CBA's shares fell as much as 2 percent by mid-session, giving up some of its gains from the day before when bank stocks rallied as a result of a milder-than-feared final report from the Royal Commission inquiry. other three major bank stocks were down about 1 percent, while the overall sharemarket .AXJO was 0.5 percent higher.
"It's just a tad soft," said TS Lim, a financial services analyst at Bell Potter Securities. "There was higher funding costs in the last six months of the year, and then there's competition. It's a combination of all of the above."
INQUIRY FALLOUT
Comyn, who started as CEO in April 2018, said regulatory scrutiny had encouraged banks to engage in more "granular" checks of mortgage customer finances.
This had created a perception that people were able to borrow less and that house prices would continue to fall.
However, he said the "heavy lifting is largely done" and there would be a "stabilisation of some of those conditions".
CBA's fee income was also under pressure from the increased level of regulatory scrutiny in the wake of the damaging revelations at the public inquiry.
Fee income fell four percent to A$1.25 billion after CBA scrapped some charges and started pre-emptively alerting customers to others.
The bank also booked A$300 million in one-off charges, including compliance costs related to the inquiry and a provision for remediating wronged customers at the wealth management unit it is selling.
Net interest margin, a closely watched gauge of bank profitability showing the difference between interest costs and interest earned, fell 0.6 of a percentage point to 2.1 percent. Net interest income also fell slightly to A$9.13 billion.
"Most line items looked disappointing," Deutsche Bank analyst Matthew Wilson said in a research note. "This looks to be a soft result and is likely to disappoint the market."
CBA declared an interim dividend of A$2 per share, the same as last year and the first time it failed to increase its interim dividend in over a decade, according to Refinitiv data.
($1 = 1.3824 Australian dollars)