UPDATE 1-Losses at UK's Co-op Bank widen after PPI charge

LONDON, Nov 7 (Reuters) - Losses at Britain's Co-operative Bank increased in the third quarter in the face of ongoing competitive pressure in the mortgage market and a 60 million pound ($77.03 million) charge for mis-selling loan insurance.

The lender posted a pre-tax loss of 118.6 million pounds for the period, compared to an 87 million pound loss the previous year.

Co-op Bank has been working to turn around its finances since its near-collapse and rescue by a consortium of U.S. hedge funds in 2017.

But a combination of competitive pressure on margins and high costs, including to separate its IT system from its old parent the Co-op Group, have kept it in the red.

The bank's net interest margin - a key measure of underlying profitability - fell to 1.76%, down seven basis points from 1.83% the previous quarter.

Co-op Bank's provision for mis-selling payment protection insurance - part of a wider industry scandal in Britain - was towards the lower end of a 55 million pound to 75 million pound range issued in September.

The bank said it was boosted by a reduction in its total capital requirements by the Bank of England, which fell to 14.54%.

Co-op Bank Chief Executive Andrew Bester said he was "encouraged" the bank grew its retail franchise and small business deposits over the period despite challenging trading conditions in Britain.

"We have been able to find pockets of growth," Bester told Reuters.

Mortgage balances increased 3.4%, with 2.6 billion pounds of new business completing during the period.

He reiterated that the bank's target was to return to profit by 2021 and said the lender would reduce costs in future quarters to help it achieve this, after they edged up in the period due to investment in a marketing campaign.

Bester said the bank’s capital position – which reduced to 20.7%, down from 21.9% the previous quarter – remained ahead of guidance.

($1 = 0.7789 pounds) (Reporting by Iain Withers; Editing by Rachel Armstrong and Emelia Sithole-Matarise)