By Sameer Manekar

(Reuters) -Australian bank Westpac raised its share repurchase programme by A$1 billion ($661 million) and declared a special dividend on Monday citing a strong balance sheet, even as its first-half profit fell 16% on tight competition and high costs.

Traditionally beneficiaries of rising interest rates, the country's so-called Big Four lenders have spent the past year sacrificing margins to write new home loans and paying more to depositors, narrowing their closely watched "net interest margin".

Westpac's net interest margin slipped to 1.89%, down 7 basis points from a year earlier, while net interest income remained largely flat at A$9.13 billion.

Its consumer division, which writes just over a fifth of the country's mortgages, reported a 32% drop in its first-half profit to A$1.08 billion owing to competition.

As a result, the country's No. 3 lender by market value posted a net profit of A$3.34 billion, below last year's A$4.00 billion. That slightly missed Visible Alpha consensus estimate of A$3.43 billion compiled by UBS.

"While inflation has fallen, getting it down to target range is proving difficult globally and here in Australia," CEO Peter King said in a media release.

"It is likely interest rates will stay higher for longer."

Westpac declared an interim dividend of 75 Australian cents per share and a special dividend of 15 cents apiece. It hiked its existing share buyback programme by A$1 billion to A$2.5 billion.

The lender's common equity tier 1 ratio - a key measure of spare cash - stood at 12.55%, 105 basis points above the operating range.

"The capital management is a strong support at WBC (dividends and buybacks) and the starting valuation much more attractive than peers," analysts at Citi wrote in a client note.

Last week, National Australia Bank (OTC:), the country's top business lender, also said it would double a buyback programme that began last August to A$3 billion even after it reported a 13% drop in its first-half cash earnings.

Westpac shares were trading 1.4% higher in early trade.

($1 = 1.5131 Australian dollars)