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By Steve Slater and Carmel Crimmins
LONDON (Reuters) - Lloyds <LLOY.L> accelerated its turnaround campaign and flagged a revival of payouts to shareholders on Thursday, paving the way for the government to start selling its stake in Britain's largest retail bank soon.
Prime Minister David Cameron is keen to show that Britain's part-nationalized 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 <RBS.L>, the other bank the government bailed out with billions of pounds of taxpayers' money during the 2008 financial crisis, is still struggling to recover.
"It is up to the government to decide how and when to do it. I believe we have completed the first phase...the share price is now in a position where the government can return taxpayers' money at a profit," Lloyds Chief Executive Antonio Horta-Osorio told reporters.
Lloyds' shares jumped more than 7 percent to a near three-year high of 74 pence, more than one fifth above the 61 pence that the government regards as break-even on its 20.5 billion pound ($31 billion) bailout.
The bank 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 can start talks with regulators about resuming shareholder payouts - seen as an important step towards the government selling its stake.
Shareholders have not received a dividend since 2008 when Lloyds agreed to rescue rival HBOS, transforming itself from a solid, high-yielding stock to a loss-making bank in need of a drastic restructuring.
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.
Analysts expect the government to sell, or place, blocks of shares with institutional investors such as pension funds.
Lloyds assured investors it could meet any additional capital requirements without having to issue shares or bonds, unlike larger rival Barclays <BARC.L>, which this week announced a 5.8 billion pound ($8.8 billion) rights issue to help it plug a 12.8 billion capital shortfall.
Despite the forthcoming Barclays share sale in September, Britain is expected to start selling about 5 billion pounds of Lloyds shares shortly, possibly this month or next.
The government reiterated on Thursday that is has no set timetable or target price for the sale.
Lloyds is the best-performing banking stock in Europe, having more than doubled in value over the past 12 months.
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.
(Editing by David Holmes and Erica Billingham)