By Matt Scuffham
EDINBURGH (Reuters) - Britain's largest retail bank Lloyds <LLOY.L> expects to return to profit this year, increasing the government's chances of selling its stake before the next general election in 2015.
Prime Minister David Cameron is keen to show that Britain's part-nationalized banks are recovering from the financial crisis and a sale of the 39 percent stake in Lloyds, at a profit, would allow him to claim at least partial success.
Lloyds is further ahead than Royal Bank of Scotland <RBS.L>, 81 percent-owned by the government, in the battle to plug property-related losses and give taxpayers back the tens of billions of public funds used to bail the banks out in 2008.
"We expect us to return to profitability this year and to grow our core business, to realize our full potential to deliver strong, stable and sustainable returns for you, the shareholders, and to allow UK taxpayers' investment in the group to be repaid," Chief Executive Antonio Horta-Osorio told shareholders at the bank's annual general meeting in Edinburgh.
He said the bank would resume paying dividends "as soon as we are able".
Lloyds' shares were the best-performing stock in Britain's blue-chip FTSE-100 <.FTSE> index last year and they hit a two-year high of 60.5 pence on Thursday, closing in on the 61 pence level which the government regards as its break-even.
Royal Bank of Scotland's stock was up 3 percent at 316 pence, meaning the government, by contrast, was sitting on a paper loss of around 17 billion pounds.
Lloyds' executives declined to comment on the likely timing of a government share sale after the meeting, emphasizing that it was a matter for the government and UK Financial Investments (UKFI), which manages the government's stake.
Chairman Win Bischoff told shareholders that the government should be able to start offloading its shares "over time". Industry sources have told Reuters that a sale would be easier once the shares traded consistently above 61 pence.
"I'll let them (UKFI) determine the tactics," Finance Director George Culmer told Reuters. "All we can do is carry on doing what we're doing in terms of delivering the profitability and fixing the balance sheet."
Britain pumped 45.5 billion pounds into Royal Bank of Scotland and 20.5 billion pounds into Lloyds to keep them and the rest of the banking system afloat in the aftermath of the collapse of U.S. bank Lehman Brothers in 2008.
Both banks have shed hundreds of billions of pounds of assets and axed tens of thousands of jobs to cut their dependence on state aid.
Lloyds made a pretax loss of 570 million pounds in 2012 and a 3.5 billion pound loss in 2011, hit by the cost of compensating customers mis-sold loan insurance. But Culmer said the number of complaints from customers about payment protection insurance (PPI) was now declining.
"Once regulatory requirements have been clearly defined and we have prudently met them, and the financial position of the group and market conditions permit, it is our intention to recommence dividend payments," Bischoff said.
Britain's financial regulator said in March that UK banks must raise 25 billion pounds of extra capital by the end of the year to absorb any future losses on loans. The regulator has not given specific guidance to banks but analysts expect Lloyds to be one of those banks facing a shortfall.
Bischoff said the bank was waiting to receive guidance from the regulator on its capital position but was confident of its strength.
At its own annual meeting this week, Royal Bank of Scotland said it would need another 18 months to strengthen its capital position enough to satisfy regulators.
RBS, which has been pushing the government to start selling its stake, said on Thursday it was cutting a further 1,400 jobs in the UK over the next two years.
Prime Minister David Cameron told reporters in New York on Wednesday that the government was "open to ideas" about offloading its RBS stake, responding to speculation over a possible share giveaway.
(Reporting by Matt Scuffham; Editing by Carmel Crimmins and Patrick Graham)