The tumble in operating profits hit banking shares and helped to depress the rest of the market. Lloyds shares rose briefly, then plummeted to close 30p lower at 401p.
Sir Jeremy Morse, chairman, said: 'Our results are generally reasonable in a not very easy world. It's a continued hard grind ahead, for us and our customers.'
Echoing the gloomy message of Midland Bank executives, who reported interim results on Thursday, Brian Pitman, Lloyds' chief executive, said: 'Against the prospect of little economic recovery with continuing high real interest rates and slack loan demand, we shall continue our efforts to enhance customer service, reduce costs and improve the quality of our loan portfolio.'
The bank raised the interim dividend to 5.9p per share from 5.4p.
Operating profits, before provisions, were pounds 697m, down from pounds 729m in the same period a year ago. According to Rod Barrett of Goldman Sachs: 'It shows that at the operating level, the recession has come through, and even Lloyds Bank can't walk on water.'
Lloyds' profits for the year to 30 June were above forecasts of pounds 300m to pounds 345m. Sir Jeremy said the improvement reflected reduced provisions for larger companies and Third World debt.
Lloyds was able to release problem country debt provisions of pounds 72m, as improved prospects for debtor countries have pushed up secondary debt market prices. This has given Lloyds' Third World debt portfolio a surplus of pounds 930m over its market value.
Lloyds has reclassified its Third World bonds as investments and, rather than releasing the pounds 930m surplus all at once, plans to write back provisions in smaller amounts over time. Completion of rescheduling arrangements with Argentina and Brazil may allow a further release of provisions, Mr Pitman said.
Lloyds made provisions for bad and doubtful debts of pounds 329m, down from pounds 425m in the same period a year ago. Domestic provisions of pounds 362m related mainly to personal customers and small and medium-sized businesses. Meanwhile, loan demand fell.
Pre-tax profits in Lloyds' core UK retail banking business dropped to pounds 11m from pounds 56m. Lower net interest income, due to lower lending volumes and a reduction in the value of interest- free funds, contributed to the fall.
Lloyds Merchant Bank made a pre-tax loss of pounds 14m, due to an pounds 18m provision for equity investments held by Lloyds Development Capital. It made a pounds 3m profit a year ago.
Corporate banking and treasury operations lifted pre-tax profits to pounds 60m from pounds 18m, helped by reduced provisions.
Lloyds Abbey Life, the insurance arm, which reported its results separately, made a pounds 142m pre-tax profit, down pounds 8m.
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