UPDATE 3-Britain's Lloyds upgrades outlook as profit beats forecasts

* Doubles third-quarter pretax profit to 2 bln pounds

* Bank raises profitability guidance from 5-7% to above 10%

* UK bank profits boosted as pandemic-related bad loan fears
ebb
(Adds share price, analyst reaction)

By Iain Withers and Lawrence White

LONDON, Oct 28 (Reuters) - Lloyds Banking Group
upgraded its outlook after posting better than expected
quarterly profit on Thursday in CEO Charlie Nunn's first set of
earnings at the bellwether bank.

Britain's biggest mortgage lender posted pretax profit of 2
billion pounds ($2.2 billion) for the July-September period,
double the figure in the same period last year and better than
analyst expectations for 1.3 billion pounds.

Like rivals Barclays and HSBC, Lloyds'
results were boosted by the release of cash - 84 million pounds
- it had set aside for bad loans last year when the economic
outlook looked gloomier.

The bank now expects loan impairments to be a net credit for
the year and its return on tangible equity - a key measure of
profitability - to be more than 10%, up from 5-7% at the end of
2020.

The bank's shares rose 2.5% in early trading, the
second-best performer on the benchmark FTSE 100 index.

Former HSBC veteran Nunn took the helm at Lloyds in August,
replacing long-standing boss Antonio Horta-Osorio after he left
to chair crisis-hit Credit Suisse.

Nunn inherits a bank placed on an even keel by his
predecessor but faces a challenge to improve returns amid
near-zero benchmark interest rates and intensifying competition
from digital rivals.

"There are clearly significant opportunities for Lloyds
Banking Group to further develop its platforms and capabilities
and grow," Nunn said.

The bank’s core capital ratio – a measure of a bank’s
financial strength – increased to 17.2%, well above its target
of 12.5%.

"The capital position is much stronger than expected, which
bodes well for future shareholder distributions, and we continue
to think a sizeable share buyback will be announced alongside
the full-year results in February," analysts at Shore Capital
said in a note.

Costs for past misdeeds continued to dent profit, however,
with the bank setting aside a further 100 million pounds for
remediation charges, including compensation for victims of
historic fraud at its HBOS Reading branch.

Lloyds has tried to trim costs under Nunn and this month
axed a further 48 branches across England and Wales as banks
across the sector cut back their high street presence in
response to growing use of digital banking.
($1 = 0.7277 pounds)
(Reporting by Iain Withers and Lawrence White
Editing by Rachel Armstrong and David Goodman)