Lloyds Banking Group today said bad debt charges ballooned to £13.4 billion as it paid the price for reckless lending at troubled HBOS.
The taxpayer-backed bank posted a £4 billion loss for the first six months of the year as lending at HBOS accounted for 80% of its hit on toxic debts.
The bank, which is 43% owned by the Government, said impairments soared in the period from £2.5 billion last year after property prices slumped and the recession took its toll on households and businesses.
Shares in the bank rose more than 10% at one point today as the loss proved smaller than analyst predictions of around £5 billion.
Lloyds said three-quarters of the impairment charge related to assets destined to be hived off into a Government-backed insurance scheme.
Once it is finalised this will mean that the majority of risk - and potential losses - associated with the assets put into it by banks will be shouldered by the taxpayer.
Group chief executive Eric Daniels said that Lloyds expected bad debt charges to be lower in the second half and reduce again next year.
He also confirmed previous statements that Lloyds would be loss-making this year, although the bank expects the economy to stabilise in the second half of this year and gradually start recovering in 2010.
The bad debt charges mainly relate to loans made by HBOS to firms in the housing and commercial property sectors at the height of the boom.
Lloyds rescued its rival HBOS at the peak of last year's banking crisis, but the hurried, Government-encouraged deal provoked outrage among shareholders concerned about the level of so-called "toxic" assets now on its books.
Chairman Sir Victor Blank took much of the flak for the deal and resigned earlier this year. He will be replaced by Sir Win Bischoff in September.
The group today admitted most of the troubled HBOS loans were "outside the traditional Lloyds low-risk appetite".
Lloyds would normally expect impairments to peak one or two years after the low point of a recession, but given the speed that the bad debt charges have hit, it expects results to improve in the second half and into 2010.
And in a sign that the business will return to its high street roots, the bank said it plans to run off £200 billion of the £300 billion of assets which accounted for a disproportionate level of risk. The £300 billion is equivalent to a third of its balance sheet.
Today's figures also show the impact of the recession on its consumer lending book, with bad debts in its retail division rising 60% to £2.2 billion, as unemployment rose while house prices have fallen.
Profits were down 95% in the high street arm, to £73 million. This was driven by a higher impairment charge, reduced payment protection insurance earnings and slimmer margins caused by historically low interest rates.
Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers, said today's share price rise represented "a collective sigh of relief" that the bank expects its impairments to have already peaked.
He added: "Lloyds remains largely reliant on the fortunes of the UK economy and, as such, is less diversified than most of its rivals," he said.
"The upbeat management comments may have provided some respite for the shares today, but the outlook is challenging."
Due to complex accounting changes relating to the acquisition of HBOS in January, Lloyds posted a statutory £6 billion pre-tax profit today.
The bank said the £4 billion loss, which stripped out this effect, could be compared to a £2.8 billion profit in the comparative period in 2008.
Meanwhile, Lloyds said cost savings from the HBOS acquisition were ahead of schedule, adding it is on track to make £1.5 billion of annual savings by the end of 2011.
Staff numbers have reduced by 2,619 to 118,207 in the first half of 2009, although the Unite union recently estimated that 8,200 staff have now been told they are losing their job this year.
A spokesman for Lloyds said the firm would not give a number for expected redundancies, although he added some new positions had been created.
He said other cost savings would come in integrating the group's IT systems and the reduction of duplication in its buildings across the country.
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