UPDATE: Lloyds shares jump despite heavy loss

Shares in Lloyds Banking Group surged this morning despite the firm reporting a £3.9bn loss for the first nine months of 2011.

Much of the loss - £3.2bn - was down to the bank setting money aside for the mis-selling of payment protection insurance.

But its total income for the period also fell 15% to £15.3bn, due to a decline in levels of business.

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On top of this, Lloyds offered a downbeat forecast for the UK economic outlook, saying it expected UK interest rates to stay lower for longer, which in turn would impact on its ability to hit income targets in 2014.

Interim chief executive Tim Tookey added that Lloyds was watching the financial turmoil in the eurozone "with a lot of caution".

Tookey is standing in for Antonio Horta-Osorio, who is currently on medical leave due to "extreme fatigue" and was keen to stress it was "very much business as usual" while he was away.

But investors latched onto the positives amongst the gloom, sending Lloyds' share price up 8% in morning trading.

Bad loans were sliced from £2.8bn in the second quarter to £1.96bn in the third as the bank cut non-core assets to £151.4bn at the end of September, from £162bn at the end of June.

The bank's net interest margin - the difference between what it charges for loans and what it pays to borrow - was also better than expected at 210 basis points in the year to date.

Its guidance for the full year currently stands at 205 basis points.

This news seemed to convince investors Tookey was right to say "the flexibility in our strategic plan has allowed us to further improve our customer propositions, continue the reduction in our risk profile, strengthen our balance sheet and reduce costs".

"Over time, we believe our strategy will realise the full potential of our organisation for customers and shareholders," he said.