* NAB posts A$1.55 bln Q1 cash profit
* Bad debts fall 23 pct
* UK compensation outlook "uncertain" (Adds detail on bad debt reduction, UK business)
By Byron Kaye
SYDNEY, Feb 21 (Reuters) - National Australia Bank Ltd , the country's top lender by assets, on Friday posted record first-quarter cash earnings as bad debts fell, but warned it was uncertain about the fallout from an overcharging error in its U.K. business.
NAB said unaudited cash profit rose 7 percent to A$1.55 billion ($1.39 billion) for the three months to December 31, compared with A$1.45 billion a year ago.
Cash profits, which exclude one-offs, non-cash accounting items and investment gains or losses, are closely watched by investors.
NAB shares fell more than 2 percent in opening trades.
The result continues the strong run by Australia's four major banks, which analysts expect to post a sixth consecutive year of record combined profits as loans grow and bad debts shrink thanks to record low interest rates.
NAB said bad and doubtful debt charges fell 23 percent to A$324 million in the quarter.
On Feb. 12, Commonwealth Bank of Australia, the country's biggest lender by market value, said impaired loans fell 26 percent. A day earlier, Australia and New Zealand Banking Group Ltd forecast a 10 percent fall in annual bad debt exposure.
Westpac Banking Corp reports half-year earnings in May.
The flipside to the booming loan demand is intensifying competition, which banks say is resulting in margin pressure.
NAB said margin pressure and the impact of falling interest rates on capital saw revenue grow by just 1 percent in the quarter.
The bank's U.K.-based Clydesdale Bank has been compensating customers after discovering in April 2009 it had miscalculated repayments on 42,500 mortgages.
NAB said the customer redress costs were negligible in the quarter, but said UK regulators were taking an active stance on NAB's management of the situation and complaints had grown.
"There remains a wide range of uncertain factors relevant to determining the total costs associated with conduct-related matters," NAB said in a statement to the Australian Stock Exchange.
"The risk that additional provisions will be required for U.K. conduct related matters has increased since the 2013 full-year results and a full assessment of related provisions will be made... as part of the finalisation of the 31 March 2014 half."
($1 = 1.1134 Australian dollars) (Reporting By Byron Kaye; Editing by John Mair)