The bill for mis-sold payment protection insurance (PPI) at taxpayer-backed Lloyds Banking Group has soared to £4.3 billion as claims against the bank continue to pile up.
The 40 per cent state-owned lender was pushed to a £439 million loss in the first half of the year as it took an additional £700 million charge for dealing with the scandal.
The escalating PPI provision will leave taxpayers wondering when they will get their money back, campaigners warned, as the share value remains less than half the price tag paid by the Government.
But shares rose by more than 1 per cent after Lloyds revealed a lower bad debt charge, reduced eurozone exposure, increased small-business lending and higher underlying profits in its core businesses.
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: "The numbers certainly fail to shoot the lights out, but there are signs of improvement."
Lloyds touched briefly on the most recent scandal to rock the industry - the Libor rigging affair - as it admitted some companies within the group had received subpoenas from government agencies.
But the lender said it was not possible to predict "the scope and ultimate outcome" of the various investigations or private lawsuits related to the allegations.
Lloyds, which includes the Halifax, was pushed to an annual loss of £3.5 billion in 2011 by the PPI mis-selling scandal, which has plagued the entire banking sector.
The scale of claims received was underlined by figures showing it had 1,000 staff working on "erroneous" claims alone, driven by so-called ambulance-chasing legal firms.
Chief executive Antonio Horta-Osorio said: "Mis-sold PPI policies are an industry legacy issue but by redressing those affected quickly we continue to do the right thing for our customers.
"We will tackle issues from the past in a way that will, in the long run, allow us to earn back customer trust and confidence."
But Robert Oxley, campaign manager at the TaxPayers' Alliance, was not convinced.
He said: "The future looks bleak for taxpayers who have seen huge amounts of their money used by politicians to prop up the banks and are now exposed to the continued losses from the PPI scandal."
Mr Horta-Osorio's strategic review unveiled last year included thousands of job losses, as well as plans to sell off large parts of its international operations.
The group said it had cut its non-core assets by £23 billion to £118 billion in the period, which is ahead of expectations, while its international presence continues to decline, after it announced disposal or exit from 10 countries.
But this has hit underlying income which fell 17 per cent to £9.2 billion.
Mr Horta-Osorio also said the bank was looking to implement ring-fencing proposals, put forward by the Independent Commission for Banking, ahead of the 2019 deadline suggested by the Government.
The move would see Lloyds' retail operations separated from more complex, investment banking products.
Peter Vicary-Smith, chief executive of consumer publication Which?, welcomed the progress.
He said: "Consumers need to be protected from the corrosive effects of the investment banking culture sooner rather than later."
Lloyds cut its provision for bad debts to £3.1 billion, down 42 per cent from the same period last year, while its exposure to troubled eurozone countries Portugal, Ireland, Italy, Spain and Greece reduced 13 per cent to £21.3 billion.
The bank increased its 2012 target for gross lending to SMEs to £13 billion - a £1 billion rise on the £12 billion target set at the start of the year.
In the first six months of this year, Lloyds said it lent nearly £6.6 billion to SMEs, with its net lending remaining positive, up 4 per cent year-on-year.
Last week, Lloyds reached a major milestone when it finally agreed the sale of 632 branches to the Co-operative Group for up to £750 million.
While the bank admitted it would make a loss on the sale, some commentators said the deal was a crucial step in Lloyds' recovery.