Taxpayer-backed Lloyds Banking Group swung to a loss in the first half of the year after it took a £3.2 billion hit to tackle the payment protection insurance scandal.
Lloyds, which is 41% state-owned, reported a £3.3 billion pre-tax loss in the six months to June, compared to a £1.3 billion profit last year.
Stripping out the provision set aside for customers mis-sold PPI, the bank saw underlying profits plunge 31% to £1.1 billion as it struggled with the “subdued” economic climate.
Lloyds chief executive Antonio Horta-Osorio said: “We 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.
“I expect the actions we are taking, as detailed in our Strategic Review announcement, to enable us to create a high performance organisation over time and deliver the best from our franchise for both our customers and our shareholders.’
Elsewhere, the bank confirmed it had received “a number of credible initial approaches” for the 632 branches it is being forced to sell by EU regulators and hopes to have a buyer by the end of the year.
Mr Horta-Osorio unveiled his vision for the bank in June, which included 15,000 job losses as part of a cost-cutting programme.
The group, which owns Halifax, Bank of Scotland and Cheltenham & Gloucester, is being forced to sell branches in return for the £20 billion in state aid it received following the 2008 credit crisis.
The UK’s biggest lender hopes these measures will push up the bank’s share price to a level at which the Government could start reducing its stake at a profit. But at 40p - a two-year low - the price is a long way off from the 63p at which the Government would break even.
Mr Horta-Osorio refused to confirm the number of organisations who have approached the bank over the sale process after reports suggested interest had been disappointing.
He said: “We can confirm we have had a number of credible approaches and they have been in line with our expectations.”
He added: “We are confident we will find a buyer.”
Lloyds is understood to be in talks with six parties, of which only two - new bank venture NBNK and Co-Op Bank - have made formal expressions.
Lloyds reduced its bad-debt losses by 17% to £5.4 billion as improvements in its wholesale division offset a deterioration overseas, most significantly in Ireland, where the property market continues to fall.
The impairment charge for Ireland increased to £1.8 billion in the period, from £1.6 billion last year. A further 11% of the £27.6 billion loans in Ireland became impaired, resulting in 64% of the portfolio now being impaired.
But the bank said it still expects further reductions in bad debt losses in 2011 compared to last year.
The decline in underlying profits is partly down to a decline in net interest margins - the gap between what a bank charges for loans and what it pays to borrow - from 2.12% to 2.07%.
Lloyds said it was on track to meet its full year target for the Project Merlin agreement with the Government, after it extended £21.2 billion of gross lending to businesses in the period, including £6.7 billion for small businesses.