Last checked at 
* Underlying profit expected to rise to $3.2 bln -poll
* Morgan Stanley analysts forecast 450 mln stg PPI charge
* Lloyds expected to announce 9,000 job cuts -sources
* Bank narrowly passed European stress test on Sunday
By Matt Scuffham
LONDON, Oct 27 (Reuters) - Lloyds Banking Group will on Tuesday aim to show its recovery is on track after onlynarrowly passing a European health check, putting a questionmark over whether the bank can resume paying dividends thisyear.
Chief Executive Antonio Horta-Osorio will set out the bank'sstrategy for the next three years alongside third-quarterresults which analysts expect to show an increase in underlyingprofit. But Lloyds may also set aside more funds to compensatecustomers mis-sold loan insurance.
Lloyds, 25 percent owned by the British government, isseeking to convince regulators that it is in shape to pay a"modest" dividend for the 2014 financial year - the first payoutto shareholders since before the financial crisis.
But the bank was the worst-performing British bank in astress test conducted by the European Banking Authority - theresults of which were published on Sunday.
Lloyds' shares fell by 2 percent on Monday as analysts questioned whether it would be able to pass a similar test ofBritish banks by the Bank of England in December and ifBritain's financial watchdog will give a green light todividends.
The BoE test assesses banks' resilience under a scenariowhere house prices fall by 35 percent and interest rates rise to6 percent. It will place additional pressure on Lloyds, which isBritain's biggest provider of residential mortgages.
Its outcome is likely to determine whether Lloyds can pay a2014 dividend and influence the timing of future sales of thegovernment's shares in the bank. Reuters reported earlier inOctober that the government is unlikely to sell more sharesuntil the bank is ready to pay dividends.
Macquarie analyst Ed Firth said that Lloyds' chances ofpassing the Bank of England test were in the balance.
"Given that we've got a more harsh stress test to come, itseems to me that there's got to be a major risk there. It's inthe balance, 50-50," Firth told Reuters.
Firth doesn't expect Lloyds to be able to pay a dividend for2014. He expects the bank to re-start dividend payments in 2015.
But the majority of analysts do expect Lloyds to pay a 2014dividend, with the average forecast standing at 1.2 pence pershare, according to a Thomson Reuters poll of 23 analysts.
Shares in Lloyds, which were one of the top performers inthe FTSE 100 in 2012 and 2013, have fallen by 13 percentsince mid-January, in part because anticipation among someinvestors that the bank would pay a dividend for 2013 provedover-optimistic.
The bank is expected to report an underlying pretax profitfor the third quarter of 1.975 billion pounds ($3.2 billion), upfrom 1.5 billion in the same period the year before, accordingto a Reuters poll of six analysts.
Analysts at Morgan Stanley expect Lloyds to set aside afurther 450 million pounds to compensate customers mis-sold loaninsurance, taking its total bill to 10.85 billion pounds, morethan any other bank.
Horta-Osario will announce plans to cut around 9,000 jobs,equivalent to around 10 percent of Lloyds' workforce, over thenext three years as the bank closes branches in response to anincreasing number of customers banking online and automates someback office functions.
The moves are designed to cut costs and increaseprofitability at the bank, which was rescued by a 20.5 billionpound ($33 billion) government bailout during the financialcrisis of 2007 to 2009.
Horta-Osorio has returned the bank to profitability since hewas hired from Spain's Santander in March 2011,simplifying the business and slimming down to focus on lendingto British households.
Senior Lloyds executives have been discussing the next stageof the bank's development since February and have focused on howmany branches it needs to remain competitive and where furthercost cuts can be made, sources familiar with the matter said.
Horta-Osorio committed in his 2011 strategy review tokeeping branch numbers at the same level but a decline incustomers using its branches and growth in those banking onlineand via mobile phone applications has prompted a re-think.
(1 US dollar = 0.6212 British pound) (Reporting by Matt Scuffham. Editing by Jane Merriman)
