(Adds details, comment)
* H2 cash profit up 9 pct to A$3.4 bln
* FY impairment charges up 22 pct to A$1.2 bln
* Says balance sheet strengthened, funding profile improved
* Final dividend of 84 cents
SYDNEY, Nov 5 (Reuters) - Westpac Banking Corp, Australia's third-largest lender by assets, reported a 9 percent rise in second-half cash profit, beating expectations on tight costs and said it had improved its balance sheet even as bad debts rose.
Bad debt provisions, which had fallen sharply for the past three years for the 'big four' Australian banks -- Westpac, National Australia Bank, Commonwealth Bank of Australia and Australia and New Zealand Banking Group -- have started nudging up as the economy cools, highlighting the challenge ahead for profit growth.
Australia, among the few developed countries to avoid a recession during the global financial crisis, is coming under pressure from slowing Chinese growth, which is weighing on the mining sector that has so far helped shield its economy.
Westpac, Australia's second-largest mortgage lender, said second-half net profit came in at A$3.4 billion ($3.5 billion), compared with A$3.1 billion a year ago and A$3.24 billion expected by analysts. That took its full-year cash earnings to A$6.6 billion, marking the third consecutive year of record profit.
"This is a strong result in a lower-growth economic environment," said Chief Executive Gail Kelly, noting 12 percent growth in deposits and a 4 percent rise in lending.
Australia's top four banks, which posted a combined annual net profit of about $25 billion in 2011/12, are facing their slowest profit expansion in three years and bad debt provisions are seen rising, hurt by a cooling economy.
Westpac said its full-year impairment charges rose 22 percent to A$1.2 billion.
Its net interest margin, a key measure of core profitability, fell 5 basis points to 2.17 percent, while Tier I capital, a measure of a bank's ability to absorb unforeseen losses, stood at 10.3 percent .
Westpac announced a final dividend of 84 cents.
Westpac shares have risen 25 percent so far this year, making it the best performer among its peers. The broader market has climbed 10 percent. (Reporting by Narayanan Somasundaram and Lincoln Feast; Editing by Richard Pullin and John Mair)