* Q1 cash profit A$2.50 bln vs A$2.45 bln analyst estimate

* Q1 home loan balances decline A$4.5 bln

* Q1 net interest margin lower due to competition in deposits

Nov 14 (Reuters) - Commonwealth Bank of Australia's home loan book slumped A$4.5 billion ($2.9 billion) in the September quarter as it shied away from cut-throat competition but the nation's biggest lender said margins had stabilized, sending its shares higher.

The update from the originator of a quarter of Australia's A$2 trillion mortgage market suggests a strategic change is paying off: CBA was first among Australia's major banks to stop luring borrowers with cash handouts and what it called uneconomic lending rates - now it says its margin compression has stopped.

Earnings reports from Australia's other so-called Big Four lenders ANZ, Westpac and National Australia Bank showed narrowing margins in recent months as interest rate hikes since May last year spur a rush of refinancing.

CBA said cash profit was A$2.5 billion ($1.6 billion) for the quarter, which was 3% better than a consensus estimate for the period, according to data aggregator Visible Alpha.

CBA's shrinking mortgage book "reflects a disciplined approach to pricing which ensures marginal shareholder returns remain above the cost of capital in a highly competitive market," the bank said in its limited first-quarter update.

"Home lending margins stabilized in the quarter," it added, without giving figures.

Shares of CBA rose as much as 1% in morning trading, in line with the broader market as analysts welcomed the better-than-expected margin outcome and a smaller-than-expected provision for potential loan impairments.

"With many trends similar to peers, we think the market will take the slightly better NIM outcome well," said Citi analyst Brendan Sproules in a client note, using the acronym for net interest margin.

Commenting on the bank's stabilizing home loan margins, E&P Financial analyst Azib Khan said that "it would be helping on this front that CBA has been willing to forgo market share."

For the year to September, CBA said it grew its mortgage book at 0.7 times the rate of the overall mortgage industry.

($1 = 1.5686 Australian dollars) (Reporting by Himanshi Akhand in Bengaluru; Editing by Shilpi Majumdar and Shri Navaratnam)