The group made a profit before tax 28 per cent higher at pounds 801m and increased its dividend 10 per cent, six times higher than the latest inflation rate. But UK retail banking operations only broke even.
Despite the poor high street results Brian Pitman, Lloyds chief executive, promised not to impose charges on current accounts in credit, a defiant shot across the bows of the other big banks, most of which desperately want to make the move to raise their profitability.
He made clear that if one of the others dared to leap first with charges Lloyds would happily take away its customers. This is what banks such as Barclays and National Westminster most fear.
If a main competitor refuses to levy charges they cannot impose them without losing customers.
Lloyds eventually plans to introduce a new type of account for middle market customers, probably involving telephone banking, which may include charges in a new form. But Mr Pitman said this would not affect policy on existing accounts.
Sir Robin Ibbs, the new Lloyds chairman, said that one of the ironies of the attacks on the banks by politicians and the press was that they referred to 'a part of the business that is not making any money'. The UK retail banking results were disappointing and this was related directly to the recession, he said.
Mr Pitman said a drop in the margin between domestic borrowing and lending rates - the gross profit made on the loans - had cost the bank more than pounds 100m. There was also a substantial drop in the contribution of interest-free deposits as base rate fell.
The results, the first of the season, will maintain Lloyds' position as the most profitable banking group.
But it said UK retail banking made only pounds 5m before tax, pounds 100m less than in 1991, despite roughly the same bad debt charges. Fee income grew 8 per cent, but Lloyds defended this as mainly a growth in business volume.
Small business lending produced a substantial loss. Sir Robin criticised campaigns against banks for mistreating small firms, saying: 'Enormous efforts have been made to fan the situation into an inferno with the hope of roasting us.'
Bad debts on lending by UK branches rose pounds 12m to a record pounds 563m, which was spread widely among personal accounts and small and medium-sized businesses. This made up by far the largest part of the group-wide bad debts of pounds 736m, down pounds 182m.
Before bad debts, group profits were up only pounds 32m. So the reduction in bad debts accounted for much of the improvement in pre-tax profits.
One key reason for the lower group bad debts outside the retail banking business was a pounds 145m reduction to pounds 83m in the amount provided against loans to larger companies, where there were fewer failures. A second was a pounds 122m write-back of problem country debt, pounds 82m more than the year before. Lloyds' problem country debts are still worth pounds 820m more than book value, measured at prices the debt is trading in the markets.
The bank gave conflicting signals about property prices, writing its properties down pounds 68m in the balance sheet but deducting a further pounds 153m when calculating their value for regulatory purposes.
Mr Pitman said the board thought the pounds 153m would not be a permanent fall, and added that branch premises sold had in every case realised more than book value.
Lloyds was taking the most pessimistic view of regulatory capital, which is monitored by the Bank of England. He denied this was at the insistence of the Bank.
After the failure of the bid for Midland last year, which cost pounds 4m, Lloyds is still convinced there will be restructuring of UK branch banking. But Mr Pitman hinted that Lloyds' studies of further moves were ranging much wider.
He said: 'We have passed a rule over most banks and we know where we stand with most banks in different parts of the world.'
The Banking, Insurance and Finance Union attacked the dividend increase as 'shareholders doing well at the expense of staff and customers' at a time when staff were being offered a zero percentage rise. Lloyds said that staff cuts this year would be less than the 4,160 last year and branch closures were over.
The shares closed 6p higher at 534p.Reuse content