LONDON (Reuters) -NatWest's ( NWG ) first-quarter profit fell by a less than expected 27%, it said on Friday, hit by competition for savings, lending and mortgage products which has squeezed margins across the sector.

The British bank said pretax operating profit for the January-March period was 1.3 billion pounds ($1.63 billion), down from 1.8 billion pounds a year earlier and just above the average of analyst forecasts of 1.2 billion pounds.

NatWest ( NWG ) said income was 406 million pounds lower than the same January-March period a year ago, due in part to lower deposit balances and customers shifting their savings to higher-returning products.

Rising interest rates in Britain in the last two years and political and media attention on the rates that banks pay to savers has fuelled a wave of such behaviour as customers prudently switch from low-yielding accounts to higher-paying products.

Britain's biggest casualty of the 2008 crisis, NatWest ( NWG ) is this year looking to end what its chairman this week called the "sorry tale" of its state ownership since that time.

The bank has been buying back its shares on the market, and the government is considering a further sale to retail investors later in the year as it looks to sell down the remainder of its sub-29% stake in the bank.

Prospects for such a sale have been helped by the bank's robust recent performance and signs it is weathering Britain's economic stumbles well.

Impairments, a closely-watched measure of loan losses as Britain's economy tries to wrestle itself free from stagnation, came in at 93 million pounds for the quarter, better than the 186 million pounds forecast by analysts.

($1 = 0.7998 pounds)