* Bank plans flotation of TSB Bank in next 8 weeks
* Lloyds says to sell at least 25 pct of TSB
* Lloyds to hold talks in H2 to restart dividend
* Margin improves and costs fall (Adds comments from executives, analyst, details on TSB sale)
By Matt Scuffham and Steve Slater
LONDON, May 1 (Reuters) - Lloyds Banking Group's pretax profit jumped 22 percent in the first quarter as costsfell and margins improved, strengthening the bank's plan to payits first dividend since it was rescued during the financialcrisis.
Lloyds, which is 25 percent-owned by the government, said onThursday it made an underlying profit of 1.8 billion pounds ($3billion) in the first quarter, helped by a 5 percent fall incosts from a year ago to 2.3 billion pounds.
The bank needs permission from the Bank of England torestart its dividend payments and said it would apply in thesecond half of the year to restart payouts.
"We will go into those discussions with confidence about thebusiness and about our prospects," Finance Director GeorgeCulmer told reporters on a conference call.
Lloyds has traditionally been one of the highest dividendpaying stocks in Britain, but has not made a payout since thecrisis hit, when the taxpayer pumped in 20 billion pounds tokeep the bank afloat. That left Britain with a 41 percent stake,which the government has started selling at a slim profit.
Restarting dividends is seen as a key issue for Britain tosell any of its remaining stake to retail investors, possiblylate this year, and analysts said it could give shareholdersmore than half its future earnings.
"Capital build up will be basically over by 2015 and fromthere on assuming 4 percent loan growth and through the cyclerisk intensity, the bank should be in a position to returnabout 70 percent back to shareholders every year," saidChirantan Barua, analyst at Sanford Bernstein.
Shares in Lloyds Banking Group opened up 2.5 percent,compared with a 0.2 percent rise in the European banking index.
Lloyds said it is on track to launch the initial publicoffering of TSB Bank in the next eight weeks. It said it willsell a minimum of 25 percent, and will offer shares to retailinvestors.
Sources have said TSB, which has 631 branches and isexpected to be valued at about 1.5 billion pounds, is likely tofloat in mid-June. Lloyds was ordered to sell the business byEuropean regulators as a cost of taking taxpayer support.
Lloyds improved its guidance on future margin and impairmentcharges and said it expected a 2014 net interest margin of 2.4percent, an increase of around 10 basis points on previousguidance.
The margin is a key driver of profits for Lloyds andimproved to 2.32 percent in the first quarter, up from 1.96percent a year ago, which drove a 10 percent rise in netinterest income.
($1 = 0.5922 British Pounds) (Editing by David Holmes and Toby Chopra)