April 30 (Reuters) - Metro Bank posted a 4% increase in total deposits for the first quarter on Tuesday, thanks to the campaign it launched late last year to make up for significant withdrawals by customers amid reports on its financial health.

The British lender struck a 925-million-pound rescue deal in October in the wake of volatile trading and has since implemented cost cuts to heal its balance sheet.

Total deposits rose to 16.21 billion pounds ($20.31 billion) in the quarter ended March 31, from 15.62 billion pounds in the previous quarter.

Metro, launched to challenge the dominance of Britain's big banks, said its lending activity was down 4%, as it shifts focus to higher margin specialist mortgages and commercial lending.

"The significant levels of liquidity raised in Q4 2023 now enable the group to focus on low-cost relationship deposits to manage down the cost of funding," the company said in a statement.

The underlying service-led core deposit franchise increased by more than 50,000 personal and business current accounts in the quarter.

"We remain confident that financial results will continue to improve throughout 2024 as we optimise funding, deliver on cost savings, continue our asset rotation and benefit from lower yielding fixed rate treasury and mortgage maturities," Chief Executive Officer Daniel Frumkin said in the statement.

($1 = 0.7980 pounds) (Reporting by Eva Mathews in Bengaluru; Editing by Savio D'Souza and Eileen Soreng)