Lloyds TSB added to nerves at the start of the bank reporting season after it revealed more credit crunch losses but assured its underlying business was strong.

Britain's fifth largest bank posted a 70% slide in half-year pre-tax profits to £599 million after a £585 million hit from the credit turmoil and investment writedowns at its insurance arm.

However, the losses seen so far are a fraction of those suffered by its rivals and Lloyds said that on an underlying basis, profits were up 11% to £2.16 billion.

Its UK retail arm saw underlying profits rise 15% to £911 million as the group's mortgage business, Cheltenham & Gloucester, took advantage of the wider clampdown in mortgage lending to boost its share of net new business to more than 24%.

The group is now the second biggest lender of new mortgages in the UK behind Abbey, which yesterday revealed it too has been increasing share, toppling Halifax from the top spot.

The squeeze on hard-pressed mortgage borrowers was highlighted as Lloyds said it had increased profit margins on new home loans. But there may be some relief for borrowers on the horizon, according to Lloyds.

The bank is expecting rivals that have sharply pulled back lending to start coming back in to the market over the next six months.
Eric Daniels, group chief executive, said: "The mortgage market is reaching a new equilibrium.

"We expect lenders in the second half to take a more aggressive stance and put more mortgages out there. So we don't think we'll continue to take a 24% share of net new lending."

Shares in the group dropped 5% as the tumble in profits proved that Lloyds is not immune to the sector's troubles.

The reported loss brings the group's total credit crunch impact so far to £865 million.

The £585 million interim results hit includes the £387 million revealed in the first quarter, but comes on top of the £280 million reported last year.

The group said performance was also knocked by a significant drop in the value of investments at its insurance business, as the volatility in stock markets took its toll.

However, Lloyds signalled there would be no multi-billion pound fundraising move to boost its balance sheet.

While rivals such as Barclays, HBOS and Royal Bank of Scotland have turned to shareholders for cash to repair finances knocked by the credit crunch, Lloyds assured its capital position was "very robust".

The bank also announced a 2% increase in its interim dividend payout to investors at a time when many other banks are cutting or putting dividends on hold.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: "These numbers represent a cautious opening to the UK banks' interim reporting season, with profits largely pegged back by a hit in investment writedowns."

"Lloyds has not, of course, been totally immune to the wider credit crisis and the shares have dipped some 40% over the last year.

Nonetheless, concerns regarding the sustainability of the dividend have been firmly quashed," he added.

Lloyds said bad debts at its UK retail operation were 4% higher at £655 million, with mortgage accounts three months or more in arrears up 3% over the last 12 months.

It expects house prices to fall a further 10% to 15% this year and 5% in 2009, which could lead to further bad debts.

Lloyds said: "The first half of 2008 has been a challenging period for all banks, however Lloyds TSB's high quality, more conservative business model remains well positioned to withstand the difficulties of global financial markets turbulence and the marked slowdown in the economic environment."

Mr Daniels said the group was keeping on eye on acquisition opportunities as the value of banking shares have tumbled amid the credit market woes.

It has been speculated as a possible rival bidder for Alliance & Leicester, which has agreed to a £1.26 billion takeover by Spanish bank Santander.  But the group declined to comment on any potential plans for A&L and said only that it would be "very, very prudent" with any acquisition moves.

Lloyds is the first of the UK banks to report half-year results, with Halifax Bank of Scotland and Alliance & Leicester also posting figures this week.

Bank shares have come under pressure in recent days as fears mount over the half-year results season.

US investment bank Merrill Lynch this week spooked investors with news of more credit crunch losses and plans to raise to tap shareholders for more capital.