UPDATE 3-Lloyds ready for UK government sale as turnaround speeds up
* Britain expected to start selling 39 pct stake soon
* Lloyds to start talks about restoring dividend
* Lloyds confident on capital, raises profit margin guidance
* Shares jump more than 8 pct
By Steve Slater and Carmel Crimmins
LONDON, Aug 1 (Reuters) - Britain could soon start selling its stake in Lloyds Banking Group after the country's largest retail bank accelerated a turnaround and flagged a return to payouts for shareholders.
Prime Minister David Cameron is keen to show that Britain's part-nationalised lenders are on the mend, and a profitable sale of part of the state's 39 percent stake in Lloyds would allow him to claim at least partial success.
Royal Bank of Scotland, the other bank Britain bailed out with billions of pounds of taxpayers' money during the 2008 financial crisis, is still struggling to recover.
The government could sell a tranche of about 5 billion pounds ($7.6 billion) - or a quarter of its stake - to institutional investors, such as pension and hedge funds, in the next week, people close to the matter said.
If that doesn't happen, the government will probably wait until September, the people said. Bankers dislike selling shares in August because many investors are on holiday.
Lloyds Chief Executive Antonio Horta-Osorio is keen for the sale to start. "I do believe we have delivered on our part and the government can now start selling shares," he said at a press conference on Thursday.
"It's now up to the government to decide how and when to sell. They can now give taxpayers a profit on the shares."
Lloyds' shares jumped 8.2 percent to a near three-year high of 74.1 pence by 1524 GMT, more than one fifth above the 61p the government regards as break-even on its 20.5 billion pound bailout.
The government's advisers, led by JP Morgan, should be able to place stock at less than a 5 percent discount given strong recent demand, bankers said.
Lloyds said it was ahead of schedule on its goals for cost savings and capital strength. It raised guidance for profit margins after beating forecasts with a near trebling of first- half underlying profit to 2.9 billion pounds ($4.4 billion).
That performance, driven by higher margins and lower impairments on loans, means Lloyds will start talks with regulators about resuming payouts to shareholders - seen as an important step towards a stake sale.
Shareholders have not received a dividend from Lloyds, once a solid, high-yielding stock, since its ill-fated rescue of rival HBOS in 2008.
Some analysts said the dividend drought could end this year.
"Improved margin guidance suggests 10-15 percent pretax profit upgrade for 2013. We remain of the view Lloyds will announce a fourth-quarter dividend in parallel with the start of the UK government placing," said Numis analyst Mike Trippitt.
Horta-Osorio said he expects Lloyds to be "a high dividend paying stock" in the future, based on its strong cash generation.
The government reiterated on Thursday that is has no set timetable or target price for the sale.
Lloyds assured investors it could meet any additional capital requirements from regulators without having to issue shares or bonds, unlike larger rival Barclays, which this week announced a 5.8 billion pound rights issue to help it plug a 12.8 billion capital shortfall.
Lloyds is the best-performing banking stock in Europe, having more than doubled in value over the past 12 months.
It plans to list a network of 630 branches, rebranded as TSB, on the stock market by June 2014. In the 1980's, the TSB brand was the self-styled "bank that likes to say yes" before being taken over by Lloyds.
Lloyds has spent 377 million pounds on separating the branches this year, taking the total cost to 1.2 billion pounds. It still needs European Union approval to proceed with sale.
On a statutory basis, Lloyds reported a profit of 2.1 billion pounds for the six months to the end of June, rebounding from a loss of 456 million a year ago, despite taking another 500 million pounds charge for the mis-selling of payment protection insurance (PPI).
Lloyds has now set aside 7.3 billion pounds to cover the mis-selling of PPI, the most of any UK bank.
The bank said it was ahead of schedule in revamping its business and it now expected to hit a group net interest margin, a measure of profitability, of 2.1 percent for 2013 compared with previous guidance of 1.98 percent.
Lloyds expects to shrink its non-core assets to under 70 billion pounds by the end of this year, 12 months ahead of schedule. Total costs will be around 9.6 billion pounds this year, 200 million less than previously indicated.
The bank will further cut its international footprint to fewer than 10 countries by the end of 2014, from 14 now and 30 in 2011.
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