However, analysts said the performance of the bank's core businesses was strong, and that Lloyds continued to add to its stockpile of surplus capital.
Sir Brian Pitman, Lloyds chairman, hinted that the bank was building up a "war chest" to help fund future acquisitions. He expected "substantial consolidation" in the industry in 18 months
The bank said pre-tax profits fell by 11 per cent to pounds 1.28bn in the six months to June. Sir Brian explained that the headline figure had been distorted by the large pensions provision, a reduced contribution from emerging market debt and disposals during the year. Before tax, underlying profits rose by 18 per cent to pounds 1.57bn.
Lloyds has put aside pounds 400m to cover the costs of the second stage of the pensions mis-selling review. The Financial Services Authority launched stage two earlier this year to provide financial redress for "non priority" victims of pensions mis-selling. Lloyds has around 165,000 cases to review and estimates it will pay compensation in 45,000 instances.
The bank has already set aside pounds 300m to cover the costs of stage one of the review. Peter Ellwood, Lloyds' chief executive, said the first phase of the work was "on target".
Contributions from emerging markets debt fell from pounds 84m in the first half of 1997 to pounds 28m this half. Another exceptional factor was the profit made on disposals, which came to pounds 84m in the first half of 1998.
Sir Brian said there were signs of a "drift downwards" in credit quality, although there had been "no significant deterioration." Provisions for bad and doubtful debts rose by pounds 9m to pounds 280m, and there was a slight uptick in mortgage arrears.
Mr Ellwood said that, given the economic environment, the bank was keeping a close eye on its new lending business."We making sure our managers don't pick up other people's rubbish. We're emphasising quality, not quantity."
Although Lloyds share fell by 67p to finish the day at 834p, several analysts affirmed their positive rating of the stock.
David Poutney, banking analyst at Panmure Gordon, said: "The markets have been spooked by the pensions provision, and they perhaps underestimated the downturn on LDC [emerging markets] debt.
"However, I think the strength of their core businesses - particularly their mortgage business - is exceptional. History has shown that when Lloyds falls, it is a buying opportunity."
Mr Poutney would be trimming his full-year profit forecasts to reflect the reduced contribution from emerging markets debt.
Sir Brian said Lloyds could spend some of its surplus capital - estimated at pounds 1.25bn - on acquisitions. "There is significant overcapacity in the UK ... and far too much capital. I expect there to be substantial further consolidation."
Mr Ellwood commented: "We are not sitting back waiting for people to come to us.
"In-house, we have a weighty team. Outside, we have one house looking at opportunities for us in Europe and another looking for opportunities elsewhere."
Future acquisitions could include a mortgage provider or a general insurer.
The bank raised the interim dividend by 26 per cent to 6.7p a share.
Outlook, page 17