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By Iain Withers and Lawrence White
LONDON (Reuters) - Lloyds Banking Group has hiked its dividend and full-year profitability forecast despite lower first-half earnings and a murky outlook for the UK economy, as rising interest rates outpace modest growth in provisions for troubled loans.
Britain's biggest domestic bank reported pretax profits of 3.7 billion pounds ($4.5 billion) for the six months to June, down from 3.9 billion pounds the prior year, but above the 3.2 billion average of analyst forecasts compiled by the bank.
The performance from Lloyds' core consumer banking and lending businesses mirrored U.S. counterparts focused on retail banking such as Bank of America, which earlier this month reported better than expected profits.
Lloyds proposed an interim dividend of 0.80 pence per share, up 20% on the first half of last year, in a show of confidence in the face of inflation at 40-year highs that is threatening to pitch Britain back into a downturn.
Lloyds also raised its forecast for return on tangible equity, a key measure of profitability, to 13% for 2022, up from a forecast of greater than 11% as of March.
The bank's shares rose more than 4%, the second-best performers in the benchmark FTSE 100 index.
Lloyds said that while more customers were struggling with price rises, loan defaults remained below pre-pandemic levels and high employment was likely to keep them under control.
However, Chief Executive Charlie Nunn told reporters one in five of its 26 million customers were having to adapt their spending significantly - with 2.2 million cancelling subscriptions since last summer and the average family spending 89 pounds a month more on energy and food.
Around 1% of customers "are really struggling to make ends meet", Nunn said, adding the bank was targeting support such as offering to consolidate debts and financial health checks.
As central banks lift rates to combat inflation, lenders benefit from the increased gap between what they charge borrowers and what they pay savers, a dynamic which analysts pointed to as the main reason for Lloyds' strong performance.
But higher rates can also trigger defaults as customers struggle to meet repayments.
Lloyds was dented by a 377 million pound impairment charge, prompted by the worsening economic outlook, compared to a hefty release of provisions the previous year as the economy rebounded from COVID-19 lockdowns.
The bank said the charge reflected the risks posed by inflation and higher interest rates, but added its finances had proven resilient so far.
The Bank of England is expected to ratchet up benchmark rates again next week, with investors betting on the biggest hike since 1995 - a half percentage point increase to 1.75%.
Nunn said Lloyds was forecasting that rates could hit as high as 2.25% in the first half of next year.
($1 = 0.8302 pounds)
(This story corrects dividend in second bullet and fourth paragraph)
(Reporting by Iain Withers and Lawrence White; Editing by Sinead Cruise and Mark Potter)