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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

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

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