* CBA first-half profit slips 2 pct to A$4.74 bln
* CEO expresses "regret" over result,
* CEO says regulatory expenses "to be around for a while" (Adds CEO comments paragraph 5, investors' comments paragraphs 9,12)
SYDNEY Feb 7 (Reuters) - Commonwealth Bank of Australia posted a surprise drop in first-half cash profit, weighed down by A$575 million ($454 million) in regulatory costs largely related to an anti-money laundering lawsuit that is likely to further overshadow results.
Australia's biggest mortgage lender reported on Wednesday a 2 percent fall in cash profit for the six months ended Dec. 31 to A$4.74 billion from the same year-ago period, trailing expectations for a 5 percent rise by seven analysts polled by Reuters.
Cash profit, a measure that excludes one-offs and non-cash accounting items, is closely watched by investors.
"We recognise, and regret, that these costs arise from our failure to meet some standards that we should have," outgoing Chief Executive Ian Narev said in a statement.
These costs, Narev later explained to analysts, were unlikely to be a one-off expense and said he expected CBA's profits, and the entire industry, to be affected by regulatory charges "for a while, in one shape or form".
CBA is embroiled in a federal lawsuit that alleges the bank had overseen tens of thousands of breaches of anti-money laundering rules.
Narev announced his retirement amid mounting calls for his resignation following the allegations and last month, CBA said Matt Comyn, the head of its retail banking unit, would become CEO.
CBA booked an A$375 million expense to pay civil penalties and legal fees related to the money-laundering claims and an A$200 million provision for further expected costs related to regulatory, compliance and remediation programs.
The provisions come ahead of a government enquiry into misconduct into the financial sector due to start next week, and as CBA defends itself against a separate lawsuit alleging it of manipulating a key interest rate to profit at the expense of customers.
Apart from the regulatory costs, the first-half result was "operationally fine", said Omkar Joshi, portfolio manager at Regal Funds Management which owns CBA shares.
The stock has shed about 19 percent so far from its 2015 peak. It traded slightly lower on Wednesday among broader market gains of 1.1 percent.
RETAIL PROFITS SURGE
CBA's net interest margin, a key gauge of profitability that measures the difference between interest costs and interest earned, rose 6 basis points to 2.16 percent during the period, as its retail bank benefited from more expensive mortgages and lower rates paid to depositors.
UBS banking analyst Jonathan Mott, however, said the retail unit's 3 percent profit margin might not be "appropriate", echoing concerns by a government advisory body published on Wednesday.
Australia's so-called Big Four banks have raked large profits from controversial increases in mortgage prices on interest-only and investment home loans in response to regulators' concerns about home-price bubbles.
CBA declared an interim dividend of A$2 a share, up one Australian cent from a year ago.
Impairment charges were 20 percent higher from the previous half to A$596 million, mainly driven bad loans in its institutional arm, that UBS said includes an exposure to embattled British support services and construction group Carillion..
Narev declined to comment on whether the losses were related to an exposure to Carillion.
($1 = 1.2682 Australian dollars)
(Reporting by Paulina Duran in Sydney; Additional reporting by Shashwat Pradhan in Bengaluru; Editing by Jane Wardell and Miral Fahmy)