* Q1 underlying pretax up 22 pct at 1.8 bln stg
* To hold talks in H2 to restart dividends
* Margin improves and costs fall
* Bank plans flotation of TSB Bank in next 8 weeks
* Shares up 3.5 percent
(Adds comments from finance director, updates shares)
By Matt Scuffham
LONDON, May 1 Lloyds Banking Group's
pretax profit jumped 22 percent in the first quarter as costs
fell and margins improved, strengthening the bank's plan to pay
its first dividend since it was rescued during the financial
Lloyds, which is 25 percent-owned by the government, said on
Thursday it made an underlying profit of 1.8 billion pounds ($3
billion) in the first quarter, helped by a 5 percent fall in
costs from a year ago to 2.3 billion pounds.
Under Chief Executive Antonio Horta-Osorio, the bank's
financial performance has been turned around and it has slimmed
down to focus on domestic lending and meet tougher regulatory
requirements on the amount of capital it holds.
"We are supporting and benefiting from the UK economic
recovery and are delivering better underlying profitability as
well as improved returns for shareholders, from a stronger,
lower risk balance sheet," Horta-Osorio said.
The bank, which has cut costs by axing jobs and shutting
many of its international businesses, needs permission from the
Bank of England to restart dividends and said it would apply in
the second half of the year to do so.
"We will go into those discussions with confidence about the
business and about our prospects," Finance Director George
Culmer told reporters on a conference call.
Before the financial crisis Lloyds had a record of being
one of the highest dividend paying stocks in Britain. It paid
out just over half of its profit in 2005 and 2006 and the shares
yielded between 6.5 and 7 percent.
But the bank has not made a payout since the crisis hit,
when the taxpayer pumped in 20 billion pounds to keep it afloat.
That left Britain with a 41 percent stake, which the government
has started selling at a slim profit.
Restarting dividends is seen as a key prerequisite for
Britain to sell any of its remaining stake to retail investors,
possibly later this year, and analysts said it could hand out to
shareholders more than half of its future earnings.
Lloyds is building up capital and its core Tier 1 ratio - a
key measure of its financial strength - stood at 10.7 percent at
the end of the first quarter. Horta-Osorio said last month he
expects UK regulators to require banks to hold 11 percent.
Analysts say that, when Lloyds reaches that level, it will
be in a position to pass on more of its future profit to
"Capital build-up will be basically over by 2015 and from
there on assuming 4 percent loan growth ... the bank should be
in a position to return about 70 percent back to shareholders
every year," said Chirantan Barua, analyst at Sanford Bernstein.
Some analysts had expected Lloyds to pay a dividend for
2013, but those hopes were dashed when the bank warned in
February it would need to take a further 1.8 billion pounds
charge to compensate customers who had been mis-sold loan
Lloyds has set aside 9.8 billion pounds to deal with claims
over mis-sold payment protection insurance or PPI, more than any
other bank, and Culmer said he could not say for certain it will
not have to pay out more. Analysts say further charges could
dent its dividend hopes.
Shares in Lloyds were up 4.6 percent at 0845 GMT, compared
with a 0.5 percent rise in the European banking sector.
Lloyds also said it was on track to launch the stock market
flotation of its TSB Bank unit in the next eight weeks. It said
it will sell a minimum of 25 percent and will offer shares to
Sources have said TSB, which has 631 branches and is
expected to be valued at about 1.5 billion pounds, is likely to
float in mid-June. Lloyds was ordered to sell the business by
European regulators as a cost of taking taxpayer support.
Lloyds improved its guidance on future margin and impairment
charges and said it expected a 2014 net interest margin of 2.4
percent, an increase of around 10 basis points on previous
The margin is a key driver of profits for Lloyds and
improved to 2.32 percent in the first quarter, up from 1.96
percent a year ago, which drove a 10 percent rise in net
The government has so far sold shares in Lloyds worth 7.4
billion pounds, reducing its stake to 25 percent, and wants to
sell off the remainder before the next election.
($1 = 0.5922 British Pounds)
(Additional reporting by Steve Slater; Editing by Toby Chopra
and David Holmes)