Lloyds shares rise 3.5% after forecast-busting £1.6bn profits

Lloyds Banking Group has reported much better than expected first half profits, adding to the upbeat news from the banking sector this week.

Shares rose 3.5% to 74.3p after the group - which bought HBOS at the peak of the financial crisis - said pre-tax profits in the first six months of the year totalled £1.6 billion - well above the consensus analyst forecast of £858 million.

In the same period last year, Lloyds reported a loss of £3.95 billion. 

The group said impairments were much lower than originally expected at £6.5 billion, down from 13.4 billion in the same period a year ago.

Joseph Dickerson, analyst at Execution Noble and one of the first to suggest Lloyds could make a profit this early cheered the quality of the result. He said there was positive news on the net interest margin - the difference between the interest income and the amount of interest paid out to customers - which came in ahead of expectations and which Lloyds said will increase again in the second half. 

Yesterday Northern Rock said that the amount it was paying out far exceeded receipts from mortgage customers.

Dickerson also said the group had made good progress improving the strength of its finances thanks to a £14 billion increase in deposits since the end of last year.

Chief executive Eric Daniels said the return to profit was a 'significant milestone' for the business.

'Despite the challenging economic environment, the core businesses performed strongly and we continued to see positive momentum across all of the key income statement line items,' he said,

Lloyds  said total income rose 5% to £12.5 billion.

For those analysts still sceptical about the prospects for Lloyds the main worry is whether the group will be able to refinance borrowing at similar rates over the next couple of years.

Bruce Packard, analyst at Seymour Pierce, said today's result is a 'profit in an accounting sense, rather than an economic sense, given the £132 billion of Government support the group is still receiving and the billions of wholesale funding with maturity of less than one year maturity.'