Lloyds TSB saw its pre-tax profit fall by 70 per cent in the first half of the year after turbulent global markets and the continuing credit crunch took their toll on the high street lender.

Shares in Lloyds TSB fell 6.5 per cent to 300.5p.

The bank took £585 million in writedowns and impairments on its portfolio of structured credit investments as well as a £505 million decline in the value of investments held by its insurance business, mainly because of falls in fixed income and equity markets.

Lloyds TSB also reported a £289 million tax charge levied on policyholders' profits from its investment funds.

In the underlying business, which excludes items such as the insurance investment decline and policyholder tax, there was a 19 per cent fall in pre-tax profit to £1.5 billion.

Eric Daniels, chief executive at Lloyds TSB, described the bank's performance as robust, given the tough market conditions.

"Our business model is really coming through," he said. "We didn't have some of the racier, higher-margin lending of the past so we don't have to make the adjustments coming into more difficult markets."

The bank maintained its capital ratios as other banks struggled to boost theirs with rights issues.

Lloyds has a core equity Tier 1 ratio — a measure of financial strength — of 6.2 per cent. Most banks are aiming at core ratios of between 6 per cent and 7 per cent. It increased the interim dividend by 2 per cent to 11.4p per share.

Lloyds TSB reported a three per cent increase in arrears on its mortgage portfolio, compared with the same period last year, but did not give a figure for the percentage of bad debts in its total mortgage book.

The bank said that it expected this trend to continue. The bank was the second biggest mortgage lender in the first half, taking a 24 per cent share of new loans through its Cheltenham & Gloucester division. It has about 9 per cent of the total mortgage market.

The bank has predicted house price falls of between 10 per cent and 15 per cent this year and a further five per cent next year — the most bearish outlook of any of the UK banks so far.

Echoing comments made by Abbey, its high street rival, which yesterday revealed a 26 per cent share of new mortgages, Mr Daniels said that he expected Lloyds TSB's share of net new lending to deline in the second half of 2008.

"The market is reaching a new equalibrium. In the second half of the year, we'll see lenders taking a slightly more aggressive stand and putting more mortgages out there."

Mr Daniels gave a modestly optimistic view of the UK economy going into the second half.

"We're looking at 1.6 per cent to 1.8 per cent growth in the economy this year and somewhat slower growth next year, somewhere around 1.3 per cent," he said. "We think there's a chance of recession but our base case is just lower growth."

Mr Daniels said that although Lloyds TSB continued to look at acquisition targets — it was connected in recent months with a possible bid for Deutsche Postbank but is thought to have lost interest — there was still room for growth in the bank's core businesses. "We're looking, as you'd expect us to, but we'll be very, very prudent," he said.

Lloyds TSB has no exposure to investments backed by US sub-prime mortgages.

Its £585 million hit comprised a £62 million writedown and £170 markdown in the value of its collateralised debt obligations (CDOs) made up of asset-backed securities, as well as a £46 million writedown on its structured investment vehicles and £307 million in markdowns on its trading portfolio.

Writedowns are made when a company believes that it is likely to make a loss on an asset, while markdowns reflect a reduction in the market value of an asset, which may yet bounce back.

Analysts at Panmure said that the dividend increase indicated that Lloyds TSB intended to trade through the tougher markets ahead, but David Buik, a commentator with BGC Partners, the spread betting firm, was critical of the bank's failure to secure a takeover.

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