Part state-owned lender Lloyds Banking (LLOY) is up 6.5% to 72.9p after reporting its first interim profit for three years. The bank made £2.1 billion pre-tax in the six months to July, reversing the £456 million loss it made during the same period in 2012.

Management says they are on target to generate a better than expected interest margin of 2.1% this year, ahead of its original 1.9% estimate. This increase, along with its new profits, suggests the bank may soon revive its dividend.

Web - Lloyds - Aug 1

Lloyds, which is 39% owned by the government, increased its lending by £3 billion, or 1%, during the period. Bad debts fell 43% to £1.8 billion while its core tier 1 capital ratio increase to 13.7%, up from 12% at the end of December.

Yet management has allocated a further £450 million to cover its compensation payments for miss-selling payment protection insurance.

The results are good news for chancellor George Osborne. In June, he confirmed the government would look at offers to privatise the bank it bailed-out for £20 billion five years ago following its disastrous takeover of Bank of Scotland. This led to speculation that sovereign wealth funds and former trade minister Lord Davies were preparing bids for the government's stake.

Lloyds is trading above the government's 61.5p breakeven price, but Osborne will be looking at bids well ahead of that level to starve off accusations that the government did not get fair value for the taxpayer.

The bank needs to find £8.6 billion to meet Basel III?s minimum requirement of holding at least 7% of its risk weighted assets in cash. It also needs to meet a leveraged ratio of carrying 3% of its loan book in cash. It is selling assets to help address this funding requirement.

Barclays (BARC) on Tuesday (30 Jul) announced a rights issue and convertible bond programme to help raise part of the £12.8 billion it needs to meet the Basel requirement. Lloyds? management assures investors that it has adequate capital to meet the requirements without issuing bonds or fresh equity.

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account. AJBell logo

Issue Date: 01 Aug 2013