* Says will be profitable on a combined basis in 2010
* Says bad debts at lower levels than expected
* Analyst says raises prospect of pre-election placing
* Shares up 10 percent (Adds detail on cost of government stake, further background, updates shares)
By Myles Neligan
LONDON, March 19 (Reuters) - Bailed out British lender Lloyds Banking Group (LLOY.L) said on Friday it would return to profit this year thanks to a bigger than expected drop in bad debts, wrong-footing forecasts for another loss, and sending its shares sharply higher.
Lloyds, which sank 6.3 billion pounds ($9.63 billion) into the red last year after being hit by a steep jump in bad loans “believes that it will be profitable on a combined basis in 2010,” it said in an unscheduled trading statement.
The bank said the improved outlook reflected “good” overall trading in the first ten weeks of 2010, with bad debts “trending at lower levels than anticipated,” and costs falling compared with the same period last year.
Lloyds shares were up 10 percent at 61 pence by 1300 GMT, making them the top riser in the FTSE 100 share index, and bringing them closer to the average 74 pence level at which the British state bought a 41 percent stake in the lender to prop it up after the 2008 banking crisis.
Analysts said news bad debts were falling faster than hoped in 2010 would reassure after a previously-flagged drop in impairments during the second half of last year fell short of some investors’ expectations.
“Having disappointed a little bit with the full-year results, this kind of puts them back on track,” said Simon Willis, banks analyst at stockbroker NCB.
Lloyds is currently forecast to make a 300 million pound loss this year, analysts said, citing the bank’s own calculation of consensus expectations.
Lloyds’ stronger performance and rising share price make it more likely the British government will try to sell part of its stake in the bank before an election expected to take place in May, Execution Noble analyst Joseph Dickerson said.
“The stock should be strong today and we anticipate follow through, but would flag the prospect of a pre-election placing in the stock,” he wrote in a note.
The British government, which also holds an 84 percent stake in Royal Bank of Scotland (RBS.L), has said it hopes to generate a profit for the taxpayer by selling its bank holdings, but has not set a timetable for disposals.
The bank, created by the government-engineered takeover last year of ailing lender HBOS by high street rival Lloyds TSB, has been hit by spiralling bad debts -- mostly inherited from HBOS -- as loans advanced during the boom years turned sour. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a graphic comparing performance of Lloyds with HSBC, Barclays and RBS, click on r.reuters.com/ryn44j
To read the latest Breakingviews column on Lloyds, please click here: [ID:nLDE62I0M0] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Lloyds, whose loans as a ratio to deposits stood at 169 percent at the end of last year, high by industry standards, is also striving to bridge the gap so as to reduce its reliance on expensive wholesale funding.
The bank had previously said that its bad debts probably peaked in the first half of 2009, and confirmed last month that total loan impairments fell by about a fifth in the second half of the year.
Lloyds, which cut 13,000 jobs in 2009, is also pushing through an austerity drive aimed at taking out 2 billion pounds in costs by the end of 2011.
The bank’s 2009 results were reported on a “combined business” basis, which excludes some accounting items associated with the HBOS acquisition, and assumes HBOS was acquired at the start of 2008.
Lloyds’ 6.3 billion pound loss last year compares with a 6.7 billion pound loss in 2008. ($1=.6545 pounds) (Editing by Hans Peters)