* Cash profit A$1.8 bln

* Home and business lending jumps A$7 bln

* Net interest margin falls

SYDNEY, Nov 11 (Reuters) - Commonwealth Bank of Australia , the country's largest bank, on Wednesday said first-quarter cash profit fell 16% as near zero interest rates squeezed margins and offset sector-leading lending growth.

Australia's four biggest lenders have seen cash earnings fall by over a third in fiscal 2020 as the pandemic-driven economic crisis batters the sector.

But while some of its peers have been cautious about expanding their loan books in such a market, Commonwealth Bank has shown a solid appetite to lend.

The bank reported a A$7 billion ($5.1 billion) increase in home and business lending during the three months to September, twice the average increase by its peers.

With the official cash rate down to 0.1%, CBA and its peers chose to protect their margins by lowering fixed rates rather than passing on the savings to the majority of their mortgage customers who have variable-rate products.

While that slowed the pace of margin erosion as customers need to refinance their loans to benefit, CBA said more were doing so thus lowering its net interest margin - the difference between interest earned from lending and paid for deposits. The bank did not say how much its margin had fallen.

Cash net profit after tax, which excludes one-offs and non-cash accounting items, dropped to A$1.80 billion ($1.3 billion) in the three months ended Sept. 30, CBA said.

The trading update was "slightly underwhelming ... for a premium rated stock," Credit Suisse analysts said. Goldman Sachs agreed, maintaining its sell rating on the bank, which trades at a 24% premium to peers.

CBA said impaired and other troublesome assets fell to A$8.40 billion, from A$8.70 billion as of June-end, due to pandemic support for borrowers including freezing loan payments for several months.

About 4% of all home loans and 3% of SME business loans were still in the pandemic deferral programme, down from about 11% and 28% respectively in June.

($1 = 1.3732 Australian dollars) (Reporting by Paulina Duran in Sydney and Shashwat Awasthi in Bengaluru; Editing by Aditya Soni and Stephen Coates)