(Reuters) - National Australia Bank on Thursday reported a decline in annual cash profit, largely in line with market expectations, as the country's second-largest lender grappled with intense home-lending competition and escalating deposit costs.

The lender said credit growth in the country is expected to slow over 2025 and 2026, suggesting a cooling in demand for loans and increased competition among banks for a smaller pool of borrowers.

With interest rates at a 12-year peak of 4.35%, Australian banks face rising costs as depositors move funds into savings accounts paying more attractive rates and borrowers struggling with loan repayments and elevated loan costs.

"While moderating inflationary pressures are encouraging, this is happening gradually meaning cash rate cuts are unlikely before February 2025," NAB said in a statement.

NAB, which is Australia's top business lender as well as a top-tier mortgage provider, said cash profit came in at A$7.10 billion ($4.66 billion) for the year ended Sept. 30, compared with A$7.73 billion last year and a LSEG estimate of A$7.07 billion.

As mortgage repayments rise, borrowers face greater difficulty qualifying for new loans or credit due to the impact on their debt-to-income ratio, a crucial metric for lenders assessing borrowing capacity.

Net interest income fell by 0.3% to A$16.75 billion from A$16.81 billion a year ago, while net interest margin - a key gauge of profitability - declined 3 basis points to 1.71%.

The bank declared a final dividend of 85 Australian cents apiece, up from 84 Australian cents a year ago.

($1 = 1.5232 Australian dollars)

(Reporting by Roushni Nair in Bengaluru; Editing by Shailesh Kuber)