Lloyds sees increased profits on mortgages

Lloyds, which is 41 per cent owned by the Government, reported increased income in its retail banking arm during the third quarter thanks to greater mortgage margins.

Borrowers reverting on to standard variable rates and raised rates on new lending helped offset "subdued" demand for home loans, according to the group.

The Halifax and Cheltenham & Gloucester owner said it had a "good" third quarter overall thanks to further declines in losses on loans turned sour since the half year, when it reported profits of 1.6bn.

Lloyds said it was pricing new mortgages to "more appropriately reflect risk and funding costs", hitting first-time buyers and home-movers.

But the bank stressed that interest rates were still below the average seen before the credit crunch in 2007.

The third-quarter performance has kept Lloyds on track for a "good financial performance" for the full year.

Lloyds said earlier this year that it was on course for annual profits - which would mark its first full-year surplus since being bailed out by the taxpayer at the height of the financial crisis.

Chief executive Eric Daniels, who last month announced plans to retire in 2011, said: "I am pleased to report that we had a good third quarter in our core business as we continue to deliver against the group guidance we provided at the interims."

But Lloyds has come under pressure in recent days as banking experts have speculated on the potential bill the group could face for claims relating to controversial payment protection insurance (PPI), with one analyst estimating it could be forced to pay up to 1.5bn.

The company is among a group of major banks backing a British Bankers' Association move to seek a judicial review against rules on PPI compensation.

Mr Daniels said he believed the banks had a "very good case" and "don't believe there will be a charge".

Lloyds also signalled today that it would not need to raise more capital to meet tough new rules on capital strength under the so-called Basel III plans.

There had been fears that other UK banks would follow the lead of Standard Chartered, which recently announced aims to tap shareholders for cash to help bolster its balance sheet to take the new regulations into account.