(Bloomberg) -- Lloyds Banking Group Plc, Britain’s biggestmortgage provider, said it will exceed its lending profitabilitytarget after first-quarter earnings beat analyst estimates. Theshares jumped the most in a year.

Pretax profit before one-time items rose 21 percent to 2.2billion pounds ($3.4 billion) from the year-earlier period,surpassing the 2 billion-pound average estimate of six analysts ina Bloomberg survey. The bank said on Friday it expects its netinterest margin to exceed its 2.55 percent annual target.

The results bolster Chief Executive Officer Antonio Horta-Osorio’s efforts to return the bailed-out bank to full privateownership. Since taking over in 2011, he’s cut assets, shrunk theretail network and eliminated thousands of jobs, allowing thelender to post its first annual profit in five years in 2014 andresume paying dividends. The coalition government has pledged tocut its 21 percent stake after next week’s election by sellingshares to individual investors.

“I was impressed by the results,” James Bevan, CEO at CCLAInvestment Management Ltd., who owns the stock, said in aninterview on Friday. Lloyds “trades relatively highly in terms ofprice-to-book but I fully expect the share price to be up to apound in twelve months’ time.”

Shares Rise

The shares jumped as much as 4.4 percent, trading at 80.36 penceat 10:20 a.m. in London. That’s above the 73.6 pence at which thegovernment would break even on its shares. Lloyds has increasedabout 6 percent this year, while Royal Bank of Scotland Group Plcdeclined 15 percent.

The price-to-book ratio, a measure of a company’s stock priceversus the value of its assets, is 1.3 percent, the highest of anymajor U.K. lender. Barclays Plc is 0.7 percent.

Lloyds’s net interest margin, the difference between its incomefrom lending and cost of funding, widened to 2.65 percent in thefirst quarter from 2.3 percent a year ago. At RBS, the measure fellas mortgage margins shrank, the bank said on Thursday.

While British lenders’ profitability has been squeezed byrecord-low interest rates, faltering housing demand and toughercompetition, Lloyds benefited from decreasing costs of borrowing,according to Chief Financial Officer George Culmer.

‘Earnings Upgrades’

Pretax profit fell to 1.2 billion pounds from 1.4 billion poundsa year earlier, hurt by a 660 million-pound charge linked to thesale of its TSB Banking Group Plc unit to Banco de Sabadell SA.Revenue rose 3 percent to 4.6 billion pounds from a year earlier,Lloyds said.

“This is a very good set of numbers,” said Joseph Dickerson, ananalyst at Jefferies International Ltd. in London with a holdrating on the shares. “The net interest margin is bucking the trendwe’ve seen of declines elsewhere. I would expect that theirimproved guidance will likely lead to earnings upgrades.”

While Lloyds didn’t take any additional charges to compensatecustomers for wrongly sold paymentprotection insurance in the first quarter, Culmer said ona call with reporters that he can’t rule out furtherprovisions.

Legal Costs

Although Lloyds has 1.7 billion pounds of unutilized reserves tocover the cost of PPI, Jefferies’s Dickerson said the bank willprobably set aside as much as 750 million pounds in the secondquarter. The lender has so far taken provisions of about 12 billionpounds, more than any other bank.

Other lenders are also grappling with rising legal costs. RBS,Britain’s largest government-owned lender, on Thursday reported anet loss of 446 million pounds in the first quarter after a profitof 1.2 billion pounds a year earlier. The bank, which has postedseven straight losses through 2014, has set aside about 3.8 billionpounds for PPI.

Britain’s Conservatives have vowed to sell more Lloyds shares tothe public in a discounted mass privatization if they retain powerin next week’s election. Prime Minister David Cameron, neck andneck in polls with opposition leader Ed Miliband’s Labour party,has said he would like to recoup the 20 billion pounds taxpayersspent bailing out the lender.

“Lloyds is printing its highest risk adjusted margins in recenthistory and the lowest risk numbers,” said Chirantan Barua, ananalyst at Sanford C. Bernstein in London with an market performrecommendation on the stock. “However the biggest risk to the bankas a pure U.K. play is the elections.”

Lloyds Dividend

British lenders have been seeking ways to shore up their capitalahead of a second round of stress tests conducted by the Bank ofEngland later this year. RBS and Lloyds narrowly passed last year’sexams.

Lloyds has built up the largest capital buffer of any Britishbank. Its common equity tier 1 ratio, a measure of financialstrength, rose to 13.4 percent from 12.8 percent at the end of2014. The bank’s loan-to-deposit ratio was at 109 percent, comparedwith 107 percent at the end of the year.

The bank reiterated that it plans to pay an interim and a finaldividend for 2015.

Lloyds is “solidly ahead of European peers” including DeutscheBank AG and Credit Suisse Group AG, said Jonathan Tyce, an analystat Bloomberg Intelligence. “Lloyds’s underlying profit retentiondrove common equity Tier 1 growth and will boost hopes of the bankrestating dividends.”

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