Lloyds losses add to fears for taxpayers' cash

The prospect of taxpayers recouping their £17.5bn investment in Lloyds Banking Group moved further out of sight yesterday after the financial services giant swung to a £3.3bn first-half loss.

The Government, which breaks even on its injection in the bank at 63.2p a share, was nursing a £7.8bn paper loss last night as Lloyds' move into the red combined with widespread concerns about the global economy to push the bank's shares down by 10 per cent to 34.99p.

Antonio Horta-Osorio, Lloyds' chief executive, insisted that the bank had received several "credible" bidders for the 632 branches it was asked by the EU to divest in return for the UK government aid, as he played down speculation that interest in the business had been low.

Preliminary bidders for the business – which include the old Cheltenham & Gloucester and Lloyds TSB Scotland branches and will be Britain's seventh-biggest bank when separated – are understood to include Sir Richard Branson's Virgin Money, and a vehicle run by the Pizza Express founder, Hugh Osmond.

Lloyds, which reported a £1.3bn profit a year ago, was dragged into the red this year by an already disclosed £3.2bn provision for compensating customers who were mis-sold payment protection insurance (PPI), and a 14 per cent jump in bad loans in Ireland, to £1.8bn.

When the PPI charge is stripped out, Lloyds made a £1.1bn profit on a "combined business basis", down from £1.6bn last year.

Mr Horta-Osorio said: "We have delivered a resilient first-half performance, despite the ongoing challenges of economic and regulatory uncertainty, and have made substantial progress in restructuring and de-risking the group."

He noted that conditions had "softened in the past five weeks" and said "we continue to monitor economic conditions closely, notably in the UK and eurozone".

The group said it was on track to meet its Project Merlin business lending agreement with the Government this year, making a total of £21.2bn of loans, of which £6.7bn were extending to small and medium-sized enterprises (SMEs).

Asked about the eventual sale of the Government's stake in Lloyds, Mr Horta-Osorio said: "I can't tell you that... it is up to the Government to decide when to sell."

The Government has so far made no comment on when it hopes to sell the Lloyds stake, or its holding in Royal Bank of Sotland, or even whether it would look to at least break even on its investment.

The Government initially injected £20bn into Lloyds, equating to 73.6p a share. However, Lloyds later paid the Government a £2.5bn fee to exit its asset protection scheme, cutting the injection to £17.5bn and the break-even share price to 63.2p.