LONDON, England — BRITAIN’S part-nationalised Lloyds Banking Group said yesterday that it turned a profit in the first quarter — and expects one for the full year — as the rate of impairments on bad loans slowed.

The report was a further sign of recovery at Lloyds and Royal Bank of Scotland, both bailed out by taxpayers at the height of the financial crisis. Shares in those banks are now trading above the value the government paid for its stakes.

In a statement, Lloyds said provisions for bad loans were lower in both its retail and wholesale divisions.

“I think the return to profitability shows the banking system is stabilising,” said Treasury chief Alistair Darling, who was on the election campaign trail in Wales.

“The economy is recovering but it’s still fragile. We are not out of the woods yet.”

Lloyds, created from the merger of Lloyds TSB and Halifax/Bank of Scotland, said it was also making good progress on integration savings, and expects to achieve £2 billion ($3.1 billion) worth of synergies and other savings by the end of next year.

The government currently holds a 41 per cent stake in the bailed-out company.

Lloyds shares were up 3.9 per cent at 72.96 pence in early trading on the London Stock Exchange, but fell back below 70 pence at midday. The stock has risen from a low point this year of 46.58 on February 12.

“Investors may be looking at Lloyds anew,” said Richard Hunter, analyst at Hargreaves Lansdown Stockbrokers.

However, “the overhang of the government stake will remain a technical drag on the shares, whilst the bank is still largely tied to the fortunes of the UK economy,” Hunter said.

Danny Clarke, analyst at Shore Capital Stockbrokers, cautioned that Lloyds still had some distance to go in its recovery.

“While momentum is certainly with the stock, we believe Lloyds still faces considerable challenges in returning to full health and delivering the target returns needed to justify further share price upside including right-sizing the balance sheet, reducing its reliance on Treasury facilities and heightened regulation and capital requirements,” Clarke said.

Favourable trends on impairments may not last, Clarke warned, citing a report by insolvency specialists Begbies Traynor that the number of firms suffering significant or critical distress rose by 14 per cent to 160,000 in the first quarter. Those companies have combined debts of £55 billion pounds, the report said.

Lloyds said customer deposits rose by £5 billion pounds in the first quarter, while lending balances were little changed.

Vince Cable, economic spokesman for the Liberal Democrat party, said Lloyds had “failed totally” to meet its commitments to boost lending to small and medium-sized businesses.

“The fact that Lloyds are making a return to profit and their share price is appreciating is not relevant,” Cable said. “The fact is they were rescued by the taxpayer.”

Lloyds said impairments in its Wealth and International division continued at a high rate, principally because of its exposure to commercial real estate in Ireland. “However, the level of impairments in the first quarter of 2010 was lower than the last quarter of 2009 and we continue to believe that we are past the peak for impairment losses in the division,” the company said.

“Impairments have slowed significantly in the first few months of the year giving us confidence that we will achieve a better financial performance than previously guided,” said Chief Executive Eric Daniels.

“I am pleased to report that we returned to profitability in the first quarter and expect this momentum to be sustained throughout 2010.”

Lloyds does not publish quarterly earnings reports; first half results are due in August.

“Based on the group’s current economic and regulatory assumptions we expect this trend to continue and for the group to deliver a combined businesses profit at both the half and full year,” Lloyds said.