UPDATE 3-Home loan boom boosts Lloyds Bank profit

* Mortgage applications in quarter highest since 2008

* Sets aside less than half expected sum to cover bad loans

* Dividend decision expected end-2020, if ban lifted

By Iain Withers and Sinead Cruise

LONDON, Oct 29 (Reuters) - Lloyds Banking Group
posted forecast-beating profits on Thursday, cashing in on a
coronavirus-driven boom in demand for mortgages as it set aside
a smaller sum of cash to cover loans turning sour due to the
pandemic.

Britain's biggest domestic lender reported pre-tax profits
of 1 billion pounds ($1.3 billion) for the third quarter, well
ahead of the 588 million pounds average of analysts' forecasts.

It booked new mortgage lending of 3.5 billion pounds after
receiving the biggest surge in quarterly applications since 2008
- equal to 22% of the UK market share for approvals - after a
cut in property transaction taxes and pent-up demand boosted
activity.

In September, the number of house purchases in Britain rose
by more than a fifth, taking the total number of sales close to
their pre-pandemic level.

"The housing market in general is much stronger than anyone
would have anticipated," Chief Executive António Horta-Osório
told reporters.

However, he warned the British economy was "decelerating" as
local lockdowns to control the virus kicked in, adding
government financial support for people and businesses had
pushed back deeper economic pain and further loan defaults to
next year.

Like its rivals, Lloyds' profits have been squeezed this
year by provisions for expected bad debts due to the coronavirus
crisis and rock-bottom interest rates.

Net income for the first nine months of 2020 fell 17% to
10.8 billion pounds, with 3.4 billion pounds booked in the third
quarter.

But echoing HSBC and Barclays results in
recent days, Lloyds' latest 301 million pounds provision for
loan defaults was back in line with pre-crisis levels and less
than half the 721 million pounds forecast.

The bank said full-year loan loss provisions are expected to
be at the lower end of the 4.5 billion pound to 5.5 billion
pound range previously given. It has set aside 4.1 billion
pounds so far this year.

"This is encouraging news, but once the stamp duty holiday
ends and given the fragile economic recovery, there are concerns
the mini housing boom could turn into a bust," said Susannah
Streeter, senior analyst at Hargreaves Lansdown.

Lloyds is in the midst of a leadership shake-up just as it
navigates the fallout from the pandemic, with Horta-Osório set
to leave next year.

Robin Budenberg will become chairman on Jan. 1, succeeding
Norman Blackwell. Horta-Osório said Budenberg and Blackwell were
working together on a search for a new CEO.

Lloyds chief financial officer William Chalmers said the
board would make a decision on paying a dividend at the end of
the year, if regulators lift a ban on payouts.

PANDEMIC SUPPORT

The robust figures saw Lloyds post a 7.4% return on tangible
equity. Its shares were trading 2.5% higher at 0909 GMT.

Lloyds' net interest margin - the difference between the
money it makes on lending and pays out on deposits - rose to
2.42%, up from 2.4% last quarter.

Lloyds has granted around 1.2 million retail payment
holidays on 69 billion pounds of lending to help ease financial
pressure on customers hard hit by the pandemic.

Around 73,000 borrowers are still benefiting from a first
payment freeze, while around 142,000 customers have requested
extended relief on 9.8 billion pounds of loans.

Retail current accounts continued to increase ahead of the
market in the third quarter, with group deposits up by 35
billion pounds over the first nine months of 2020, which Lloyds
said would help it to lend strongly into the recovery.

Its core capital ratio, a key measure of financial strength,
increased to 15.2%, compared to 14.6% at the half-year.

($1 = 0.7673 pounds)

(Editing by Rachel Armstrong, John Stonestreet and Emelia
Sithole-Matarise)