Lloyds upbeat on UK growth as profits lifted by drop in bad debts

By Steve Slater

LONDON (Reuters) - Lloyds Banking Group is confident next week's British national election will not derail healthy UK economic growth, it said on Friday after posting first-quarter profit up by a fifth thanks to sharply lower losses on bad loans and wider margins.

The state-backed lender, Britain's biggest retail bank, reported an underlying pretax profit of 2.2 billion pounds ($3.4 billion) for the three months to the end of March, up 21 percent on the year and at the top end of the forecast range.

Its shares, which had dropped the previous session to a more than two-month low, rose 3 percent to 79.7 pence by 0800 GMT, the top performers in a flat European banking sector.

"Management are clearly delivering and unlike other UK banks they have margin expansion as their expensive crisis-era funding rolls off," said Joseph Dickerson, analyst at brokerage Jefferies. "Cost performance was good and capital was good."

Chief Executive Antonio Horta-Osorio said he expected Britain's economy to grow by between 2.5 and 3 percent this year and downplayed concern that a closely fought election on May 7 could damage growth and was a risk for banks.

"I don't think the election will change these trends any time soon, we are favourable on the UK economy, it continues to progress at a healthy pace," Horta-Osorio told reporters.

Lloyds' losses from bad debts fell 59 percent from a year ago to 177 million pounds and it said asset quality this year should be better than previously indicated.

Its net interest margin (NIM), the difference between the interest it gets from borrowers and what it pays savers, a key revenue driver, jumped 33 basis points to 2.65 percent, helped by lower funding costs.

It said it expects to exceed previous guidance for its NIM to be 2.55 percent this year, but declined to say by how much.

HEALTHY PAYOUT

Horta-Osorio has turned Lloyds' fortunes around, enabling Britain to sell half its 41 percent stake in the bank, rescued at a cost of 20 billion pounds in the 2007-09 financial crisis.

Lloyds announced its first dividend in February since being bailed out and the Conservatives, senior party in the ruling coalition, have said a further 9 billion pounds of shares will be sold in the next year if it wins the election, including a sale to retail investors.

Lloyds plans to pay a dividend for the half-year and full year for 2015 and its strong capital generation has raised expectations of a healthy payout or the prospect it could buy back shares.

The bank's core capital ratio rose to 13.4 percent at the end of March from 12.8 percent three months earlier, well above the 12 percent it regards as needed.

The threat remains however of more charges to compensate UK customers for mis-sold insurance products. Lloyds did not set aside any more money for claims in the first quarter, unlike rivals Barclays and Royal Bank of Scotland.

It has set aside 11 billion pounds for payment protection insurance, far more than any other bank, and said it still had a 1.7 billion provision.

The bank's statutory profit was 1.2 billion pounds, down 11 percent, after a 660 million charge on the sale of TSB.

($1 = 0.6517 pounds)

(Additional reporting by Matt Scuffham; Editing by Carolyn Cohn and David Holmes)