By Max Colchester 

LONDON-- Lloyds Banking Group PLC said Friday its net profit narrowed in the first three months of the year, despite impairments falling and margins increasing.

The part U.K. government-owned bank said total income, net of insurance claims, was down 2% to GBP4.5 billion, from the same period a year before. Net profit decreased to GBP913 million ($1.4 billion) from GBP1.1 billion in the same quarter last year, as the bank took a hit on the spinoff of one of its units.

The retail focused bank has benefited from a resurgent economy which reduced bad loans and fueled demand for mortgages. The bank said it was raising its net interest income target--the difference between its cost of borrowing and the price it lends at--above its original target of 2.55%. Impairments fell 59% quarter on quarter.

Lloyds Chief Executive António Horta-Osório said he expected the U.K. economy to continue to grow this year despite an impending general election. "I don't think the election will change these trends anytime soon," he said on a call with reporters.

Lloyds incurred a GBP660 million loss in relation to the spin out of its TSB Banking Group PLC unit. TSB was created after Lloyds was ordered by European authorities to sell 631 branches to boost competition following its government bailout during the financial crisis.

In March Spain's Banco de Sabadell SA entered into talks with U.K. lender TSB about a possible GBP1.7 billion ($2.54 billion) takeover. As part of the spin off Lloyds pledge to pay TSB a lump sum to cover information technology costs in the event of it being bought.

In February regulators gave the bank the all clear to start paying its first dividend since its bailout in the financial crisis. The bank reiterated its plan to pay an interim and final dividend in 2015, but executives declined to comment on whether there would be any bumper handouts to shareholders. In the first quarter Lloyds didn't have to take a provision to cover the wrongful sale of insurance products to customers. However, the bank's chief financial officer declined to rule out whether more provisions would be made in the coming year.

The U.K. government, which currently owns just under a 21% in the bank, has been whittling down its interest in the lender over the past few months.

On Friday the bank said underlying profit, which strips out a number of costs, was up 21% on last year to GBP2.2 billion

Write to Max Colchester at max.colchester@wsj.com

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