* Lloyds H1 profits jump 32 pct to 3.8 bln stg
* Bad debts drop 58 pct, margins rise
* PPI bill tops 10 bln pounds after extra 600 mln hit
* Spin-off bank TSB profits drop as costs rise (Adds FD, analyst comments)
By Matt Scuffham and Steve Slater
LONDON, July 31 (Reuters) - State-backed British bank Lloyds said it had strengthened its case to restart dividendpayments for the first time in six years after reporting aone-third rise in profit for the first half of the year.
The bank, which is 25 percent-owned by the government afterbeing rescued during the 2008 financial crisis, said it wouldask Britain's financial regulator in the second half of the yearfor permission to begin paying "modest" dividends again.
Lloyds, which was one of Britain's highest dividend payingstocks prior to its 20.5 billion pound ($34.7 billion) bailout,reported an underlying profit of 3.8 billion pounds, ahead ofanalyst expectations and up 32 percent on the year before.
The bank made a statutory profit of 863 million pounds,including charges for restructuring and dealing with pastmisconduct, and said it expected its full-year statutory profitto be significantly higher than in the first half. Its coretier-one capital ratio - a key measure of its financial strength- rose to 11.1 percent from 10.3 percent at the end of 2013.
"The things that matter are being able to demonstrate astatutory profit and a strong capital position. These half-yearresults show both of those. I do think they strengthen our hand.We go in in a good position," Finance Director George Culmertold reporters.
Sanford Bernstein analyst Chirantan Barua said the bankshould eventually be in a position to return around 70 percentof earnings to shareholders each year.
"We feel the second half will be strong for the bank -especially post the imminent disposal of the government'sremaining equity in the bank; a factor which has remained anoverhang in recent times," said Barua, who rates Lloyds shares"outperform", with a target price of 100 pence.
The government is keen to sell its remaining 25 percentstake in Lloyds before the next election in 2015, having alreadysold a 13.5 percent stake, raising 7.4 billion pounds for thestate.
Shares in Lloyds were up 0.5 percent to 76.7 pence at 0705GMT, above the 75 pence and 75.5 pence price at which thegovernment made its first two share sales.
Lloyds' profit benefited from improving economic conditions,with losses from bad debts more than halving to 758 millionpounds.
Its net interest margin - the difference between theinterest the bank lends at and what it pays to savers and a keydriver of income - jumped to 2.4 percent in the first half from2.01 percent a year ago. Lloyds said it expected the margin torise to average 2.45 percent for 2014.
However, it set aside an extra 600 million pounds tocompensate customers mis-sold payment protection insurance,taking its total bill to over 10 billion pounds.
TSB Banking Group, the new bank spun out from Lloydsthat listed on the London market last month, on Thursday showedthe scale advantage that Lloyds and the UK's big banks have whenit reported a 17 percent profit drop compared with the previoussix months due to far higher costs.
TSB, Britain's 7th biggest lender, said its underlyingpretax profit in the six months to the end of June was 78.6million pounds ($133 million), as costs jumped because it nolonger benefited from the economies of scale that Lloyds has. ($1 = 0.5913 British Pounds) (Editing by Tom Pfeiffer)
Lloyds (LLOY)
