Underlying profits were higher than expected at Lloyds Banking Group in the third quarter as it confirmed cost-cutting plans to cut 9,000 jobs and close a net 150 branches, but a further provision for miss-sold payment protection insurance (PPI) were worse than anticipated.The bank's underlying profits, before costs relating to the flotation of TSB and an extra £900m put aside for compensation for PPI, totalled £2.16bn, up 44% from £1.5bn the same period last year and 5% higher than consensus analyst forecasts.Income rose 2% to £4.6bn in the quarter, with net interest income up 10%, driven by margin improvement to 2.5%.Thanks to a low tax charge in the quarter, earnings per share were 0.9p and triple net asset value of 51.8p was up 3.3p in the nine months of the year.Profits in the nine months of the year so far have been boosted by impairment charges falling 59% to £1.02bn and underlying costs declining 3% to £6.91bn.Lloyds confirmed it was in ongoing discussions with the Bank of England's Prudential Regulation Authority (PRA) regarding the resumption of dividend payments, but the payout is thought to be largely dependent on the PRA's forthcoming stress tests, the results of which are due on 16 December.Analysts are divided over whether the bank will make a final payout for the current financial year, but if one is paid it is likely to be only a small token payment.After Lloyds only narrowly passed the stress tests from the European Central Bank and the European Banking Authority (EBA), released on Sunday, the third quarter figures provided a measure of reassurance, showing its 'fully loaded' CRD IV core tier 1 ratio improved to 12.0% at the end of the period, up from 10.3% at the end of December 2013 and leverage ratio firming up at 4.7% from 3.8% nine months ago.Management have guided, somewhat conservatively, that the asset quality ratio (AQR) - an assessment of the bank's current financial health as compared to the stress test's forward-looking scenario - will be 30 basis points for the full year, down from the recent 35 guidance. AQR was down to 20 basis points in the quarter and is down 27 points in the nine months so far this financial year, requiring a step-up in the ratio in the final quarter.Chief executive António Horta-Osório said the group was "performing strongly" and had met or exceeded the strategic objectives set out in 2011", hence the new three-year plan to cut costs and grow market share, including a target of 13.5-15% of "sustainable returns on required equity" by end-2017.There will be £1bn spent on increasing its digital capabilities, which as online and mobile usage grows, will require fewer branches and the group is no longer committed to never closing a branch that left a town without a bank. Around 200 closures will be mixed with around 50 openings, with a particular focus on London and the South East.Horta-Osório believes this will see Lloyds increase branch market share as rivals shut their outlets at a faster rate.Broker Shore Capital said it expected to lift full year adjusted pre-tax profit estimates by around 3-4% to circa £7.9bn, implying adjusted earnings per share of roughly 8.0p. Analyst Gary Greenwood said he assumed a final dividend of 1.5p.Investec reaffirmed its 'buy', noting that it saw the CET1 capital ratio of 12.0% "as a useful rebuttal to stress test noise". Analysts forecast a token 1p final dividend, but "more importantly", expect an increase to 4.5p by 2016 and earnings per share of 7.9p, a prospective dividend yield of 6.0%.Espirito Santo said: "With Lloyds already trading at price to tangible book value ratio of 1.5 times and return on investment targets set at 13.5%-15% for 2017, we continue to believe that the stock is more than fully valued and remain sellers."Over at Jefferies, analysts said the bank had "ticked many of the operational boxes" and that the strategic plan "looks very credible". "We continue to argue that dividend will be a 2016 event and that capital requirements will be higher, thus returns lower, and retain our 'underperform' rating."
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