Shares in Britain’s biggest high-street lender slumped 10.2 percent to a new two-year low following the results, making any sell down of the government’s 41 percent stake acquired after a credit crisis bailout an even more distant prospect.
The loss compared with a 1.3 billion pound pretax profit a year earlier.
Its results deteriorated even after stripping out the 3.2 billion pounds already earmarked to help cover compensation for industry-wide insurance mis-selling.
Overall, Lloyds cut losses on bad loans by 17 percent to 5.4 billion pounds but the rate of improvement was much slower than the 45 percent reported for 2010 due to a further deterioration in Ireland.
“We’re long-standing bears on it,” said SVM Asset Management managing director Colin McLean.
“There was a slower rate of improvement on their (loan) impairments and a weakness in the UK housing market could lead to more impairment losses.”
Lloyds shares remain well below the 63 pence level at which the British taxpayer effectively bought its stake.
A cash-strapped British government is hoping to sell down bank stakes accumulated via credit crisis bailouts, such as its holding in Lloyds and an 83 percent stake in Royal Bank of Scotland , to raise money to cut its deficit.
However, the financial market rout and ongoing economic uncertainty mean Britain is unlikely to be able to make a profitable exit anytime soon.
Losses on bad loans at Lloyds’ Irish operations hit 1.8 billion pounds in the first six months, 14 percent higher than a year ago.
Lloyds has now lost 9 billion pounds on its Irish loans since the end of 2008 and said 64 percent of its 27.6 billion pounds of loans in Ireland are now impaired.
Losses on Australian loans also jumped 29 percent from a year earlier to 586 million pounds as property prices there deteriorate. It has 12.9 billion pounds of loans to customers in the country, and more than a third are deemed to be at risk.
Cavendish Asset Management’s Paul Mumford, who last bought Lloyds shares in late July at around 41 pence, said Lloyds still represented a good bet for investors on valuation grounds but any full recovery could be a long way off.
“The sector remains in the long shadow of the banking crisis and continuing global economic difficulties, not to mention regulatory uncertainty. There was never going to be a quick way out of the woods,” said Mumford.
“Over the medium term Lloyds will deliver value to shareholders, but the prospect is that of a marathon rather than a sprint,” he added.
In terms of risks posed by a worsening euro zone sovereign debt crisis, Lloyds said its aggregate direct exposure to the national and local governments of Spain, Italy, Portugal, Ireland, Greece and Belgium totalled 189 million pounds.
Finance Director Tim Tookey said Lloyds and other British banks had been asked by the UK financial regulator to add its exposure to Belgium to that of other European countries with debt problems, although the FSA denied it had singled out Belgium.
Lloyds’ net interest margin — the gap between what it charges for loans and pays to borrow — shrank to 2.07 percent from 2.12 percent a year earlier.
Lloyds said the lower profitability on lending reflected continued high funding costs, repayment of government and central bank facilities, and competitive deposit markets.
Its results fell way short of British rivals Barclays and HSBC, which reported respective first-half profits of 2.6 billion pounds and $11.5 billion this week.
All three banks have had to cut thousands of jobs, however, with Lloyds announcing 15,000 job cuts in June.
Lloyds was saddled with billions of pounds of losses after buying troubled rival HBOS in a 2008 rescue deal brokered by the government, and it has been forced by EU regulators to put 630 branches up for sale as payback for a subsequent state bailout.
Sources have told Reuters that Lloyds is talking to six parties, of which two — new bank venture NBNK and mutual Co-Op Bank — have made formal expressions of interest. Others have been put off the assets by high levels of lending relative to deposits.
Chief Executive Antonio Horta-Osorio told reporters he hoped to find a buyer by the end of the year and that Lloyds would allow it to take on a smaller amount of mortgages to facilitate a sale.