Westpac Group's net interest margin fell in the first quarter, reflecting higher funding costs and lower Treasury earnings, contributing to a 3.2 per cent drop in cash earnings.

Cash earnings fell to about A$1.55 billion ($2 billion) in the three months to December 31, from A$1.5 billion a year earlier, the Sydney-based lender said. Markets-related income fell by A$200 million in what CEO Gail Kelly called a "more challenging operating environment".

Impairment charges rose to about A$300 million from A$280 million a year earlier. The net interest margin fell by 10 basis points in the latest quarter. New Zealand earnings were stronger with lower impairment charges.