Lloyds back in profit

The result came as a marked turnaround on the 4 billion of losses seen a year ago and was better than expected by most analysts.

Lloyds, which is 41 per cent owned by the taxpayer, said sharply lower bad debts helped its recovery, with losses on loans turned sour more than halving in the first six months of 2010.

The Lloyds results smashed expectations in the City, with most banking experts expecting interim profits of around 800 million to 1 billion.

The bank's vastly improved bottom line performance followed a 51 per cent drop in impairments to 6.6 billion in the half year, having been saddled with 13.4 billion in bad debts a year earlier following its rescue takeover of HBOS.

Impairments are set to improve further over the second half and next year, the bank said.

Lloyds added it was ahead of Government lending targets to support the economy, which it signed up to in return for receiving a mammoth state bailout at the height of the financial crisis.

But while gross lending to businesses hit 24 billion in the first half, it admitted firms were still paying back more than the bank was lending.

Overall net lending - which takes into account repayments - dropped across the business to 612.1 billion, although it remained flat in core businesses, according to Lloyds.

Eric Daniels, group chief executive of Lloyds, said: "The first half of 2010 was a significant milestone for Lloyds Banking Group as the group returned to profit."

"Given the business model we have established, coupled with the gradual recovery in economic growth in the UK, we continue to believe that the group is well positioned to deliver a strong financial performance over the coming years."

Today's figures give fresh hope that the taxpayer will exit profitably from its exposure to banking assets.

Fellow part-nationalised player Royal Bank of Scotland is also expected to report a return to profitability when it reports on Friday.

The duo will contribute to a combined profits haul of more than 11 billion from the four major names - with HSBC reporting a bumper 7 billion on Monday.

Bruce Packard, banking analyst at Seymour Pierce, said Lloyds should be congratulated for reporting better-than-expected profits, although he added a note of warning.

"Lloyds has reported an accounting profit that is both larger and earlier than expected - but if the last few years has taught us anything, it is that banks can report healthy profits in any one reporting period, but at the same time be storing up trouble for the future."

Lloyds said it believes the UK will avoid a double-dip recession, forecasting growth of 1.3 per cent in 2010, 2.1 per cent in 2011 and then remain around 2 per cent for some years.

House prices will remain static this year and then rise 3% next year, the bank said.