By Max Colchester 

LONDON--Shares in Lloyds Banking Group PLC rose Friday, reflecting improving earnings and expectations that the bank will be in a position to return money to shareholders this year.

The bank has been slowly returning to health since its U.K. bailout in 2008, helped by cost cutting and a resurgent British economy that has reduced bad loans, increased margins and fueled demand for mortgages. The part U.K. government-owned lender is set to start paying its first dividend since the financial crisis this year.

This, along with its increased capital ratio, has raised belief among analysts that Lloyds could make a substantial payout to shareholders. Lloyds Chief Executive António Horta-Osório declined to comment on this Friday, saying investors should wait until the half-year results to find out. Shares rose 7% in early afternoon trading.

Joseph Dickerson, an analyst at Jefferies, said that a share buyback in the next 18 months "is entirely possible."

Mr. Horta-Osório said he expected the U.K. economy to continue to grow this year despite the May 7 general election. "I don't think the election will change these trends soon," he said on a call with reporters.

The bank said total income, net of insurance claims, was down 2% to GBP4.5 billion ($6.9 billion) in the first quarter from the same period a year before. Net profit decreased to GBP913 million from GBP1.1 billion in the same quarter last year, as the bank took a GBP660 million loss in relation to the spinoff of its TSB Banking Group PLC unit. As part of a potential deal, Lloyds pledged to pay TSB a lump sum to cover information-technology costs.

In March, Spain's Banco de Sabadell SA agreed to a GBP1.7 billion takeover of TSB, which was created after Lloyds was ordered by European authorities to sell 631 branches to boost competition following its bailout. The U.K. government, which currently owns just under a 21% stake in the bank, has been whittling down its interest in the lender over the past few months.

In February, regulators gave the bank the all clear to start paying its first dividend since its bailout. The bank reiterated its plan Friday to pay an interim and final dividend in 2015.

Lloyds also 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%.

In the first quarter, Lloyds didn't have to take a provision to cover the wrongful sale of insurance products to customers as it has in past quarters. However, the bank's Chief Financial Officer George Culmer declined to rule out whether more provisions would be made in the coming year.

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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