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Lloyds Banking Group has reported a return to profit for the first half of the year, largely due to a drop in the amount set aside to cover bad loans.

Pre-tax profit at the bank, which is 41%-owned by UK taxpayers, came in at £1.6bn, compared with loss of £4bn in the same period a year earlier.

Money set aside to cover bad loans fell from £13.4bn to £6.5bn.

On Tuesday, Northern Rock reported a return to profit for the period, while on Monday HSBC posted a profit of £7bn.

Total income at Lloyds rose by almost a third, to £12.5bn from £9.8bn, while costs fell by more than £1bn, largely as a result of job losses, both of which helped to boost profits.

At the close of trade in London shares in Lloyds had risen by 3.57% to 74.5 pence.

"The first half of 2010 was a significant milestone for Lloyds Banking Group as the group returned to profit," Lloyds said.

"Despite the challenging economic environment, the core business performed strongly and we continued to see positive momentum across all the key income lines."

The bank also said it was "well positioned to deliver strong financial performance over the coming years".

Bail-out

Lloyds reported earlier this year that it had made a profit in the first quarter, but did not give any details.

In 2009, the bank made an operating loss of £6.3bn, almost unchanged on the £6.7bn it lost in 2008.

Part of these losses were due to the costs of taking over HBOS during the financial crisis. Lloyds has been accused of not undertaking proper due diligence on the takeover, and therefore underestimating the extent of the bad loans on HBOS's books.

This meant the government had to step in to bail out the troubled bank, to the tune of £20bn.

The turnaround in the first half of this year makes it more likely that taxpayers will see a profit from their investment in the bank, analysts say.

The Lloyds share price is now about the same level it was when the government took its stake in the bank, when the fees associated with the investment are taken into account.

However, analysts say the government will not sell its stake in Lloyds at least until its own review of the banking sector is completed.

The new coalition government announced the comprehensive review, which will last for at least a year and will look into the merits of breaking up of the UK's big banks, in June.

Lending targets

The bank also appears to be on course to hit gross lending targets set by the government as part of the conditions of the bail-out.

Lloyds said it had lent £23.7bn to businesses during the first half year, against a target of £44bn for the year to the end of March, and £14.9bn in new mortgages, against a target of £23bn.

However, net lending figures, which take into account not just money loaned out, but money repaid as well, paint a slightly different picture.

"[Lloyds'] total net loans to all households and businesses have dropped 1% to £368bn, and it is charging more for that credit relative to what it pays for funds," said the 91�ȱ�'s business editor, Robert Peston.

Lloyds boss Eric Daniels told the 91�ȱ� the reason for the flat net lending was the fact that businesses and consumers were looking to pay down debt rather than increase their debt levels further.

"We are ahead of our lending commitments, but what we can't do is prevent our customers from paying back. Our customers are behaving very prudently. Credit is available," he said.

A number of major European banks have reported results this week:

Barclays will report its first half results on Thursday, while Royal Bank of Scotland reports on Friday.