Lloyds Banking Group shares have hit a 15-month high after the bank unveiled a 21 per cent uplift in underlying profits, a steep fall in bad debts, and no new provisions for PPI or other conduct issues.

A rise of 0.6 points to 13.4 per cent in the group's capital ratio also sparked hopes for the size of the dividend to be declared at the half-year this summer. Lloyds shares jumped almost 8 per cent to 83.27p, despite the overhang of government shares which analysts say has been depressing the price.

Chief executive Antonio Horta-Osorio said all segments of the business were on the up, and he believed the UK economy would continue to grow at up to 3 per cent regardless of who forms the next government.

He said: "I don't think the election will change this trend any time soon, we are quite favourable to the UK economy and continue to expect it to grow by 2.5 to 3 per cent."

But he said there had been a slowdown in the rate of growth in the mortgage market, which had been expected to grow by 2per cent this year against 1.8per cent last year. "The market now is up around 1.6per cent both because of the mortgage market review and because of the election, we are slightly below the market growing at 1.2 per cent....we continue to target growing with the market for the full year... which we now think will be 1.6 to 1.7 per cent."

Lloyds lifted pre-tax profit in the first quarter by 37 per cent to £1.9billion before booking a £600m loss on the sale of TSB.

It said underlying profit was up 21 per cent on a year ago to £2.18bn, on income up 3 per cent at £4.64bn.

That was driven by an improvement in net interest margin from 2.32 to 2.65 per cent, and the bank reduced its cost-income ratio from 49.3 to 47.7 per cent after keeping costs flat. The improving economy saw the bad debt charge come down 59per cent to £177m. Return on equity was up three points at 16 per cent.

The bank said its net lending of £1.1bn to SMEs over the last 12 months represented a rise of 4 per cent "in a declining market". Consumer finance lending grew by17 per cent.

On whether the capital ratio would give more headroom for the dividend, finance director George Culmer said it positioned Lloyds as the best-capitalised UK bank and showed "great progress" , but he would not be drawn further.

The bank declared no new provisions for PPI mis-selling, but Mr Culmer said there was still "risk and uncertainty" over new claims, and the bank still had £1.7bn of unused provisions on the balance sheet. Mr Horta-Osorio would not comment on whether the bank favoured a timebar for new claims, saying the Financial Conduct Authority would publish a consultation on the issue in the summer and the bank would respond.

On the possible sale of a slice of the bank to retail investors as the government continues to whittle down its 21per cent stake, the chief executive said: "We don't have a view, we will help the government in whatever they want to do, whatever the government will be at the time."

Mr Culmer said the bank had plans on stand-by and any offer would have to be off the back of a set of audited accounts at the half-year, adding: "Obviously we don't know who is going to be in number 10 next week, we will need to see what the government intends to do when they come into power."

Asked about the criticisms of Lloyds' refusal to honour some of its bonds issued at double-digit interest rates during the crisis, Mr Culmer said: "That risk no longer attaches and we have a duty to all stakeholders to do the right thing by our funding."