Pretax profit at Lloyds Banking Group’s rose 22 per cent in the first quarter, lifted by improving margins and falling costs as the bank put in place plans to pay its first dividend since it was rescued during the financial crisis.

Lloyds, which is 25 per cent owned by the British government, said it made an underlying profit of £1.8 billion in the first quarter, helped by a 5 per cent fall in costs from a year ago to £2.3 billion.

Lloyds has traditionally been one of the highest dividend paying stocks in Britain, but has not made a payout since the crisis hit, when the taxpayer pumped in £20 billion to keep the bank afloat. That left Britain with a 41 per cent stake, which the government has started selling at a slim profit.

The bank needs permission from the Bank of England to restart its dividend payments. It is set to apply in the second half of the year to restart payouts.

"We will go into those discussions with confidence about the business and about our prospects," finance director George Culmer said.

Restarting dividends is seen as a key issue for Britain to sell any of its remaining stake to retail investors, possibly late this year, and analysts said it could give shareholders more than half its future earnings.

“Capital build up will be basically over by 2015 and from there on assuming 4 per cent loan growth and through the cycle risk intensity, the bank should be in a position to return about 70 per cent back to shareholders every year,” said Chirantan Barua, analyst at Sanford Bernstein.

Shares in Lloyds Banking Group opened up 2.5 per cent, compared with a 0.2 per cent rise in the European banking index.

Lloyds said it is on track to launch the initial public offering of TSB Bank in the next eight weeks. It said it will sell a minimum of 25 per cent, and will offer shares to retail investors.

Sources have said TSB, which has 631 branches and is expected to be valued at about £1.5 billion, 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 per cent, an increase of around 10 basis points on previous guidance.

The margin is a key driver of profits for Lloyds and improved to 2.32 per cent in the first quarter, up from 1.96 per cent a year ago, which drove a 10 per cent rise in net interest income. (Reuters)