*Lloyds H1 loss 4 bln sterling vs forecast 5.1 bln loss
*Lloyds H1 bad debts hit 13.4 bln sterling, seen as peaked
*Allied Irish H1 loss 872 million euros, bad debts 2.37 bln
*Lloyds sees UK house prices rising in 2010
*Lloyds shares rise 10.6 percent, AIB up as much as 12 percent
By Clara Ferreira-Marques and Carmel Crimmins
LONDON/DUBLIN, Aug 5 (Reuters) - Lloyds Banking Group and Allied Irish Banks reported further heavy losses on Wednesday, hit by bad debts totalling a combined $26 billion, but both cheered investors with predictions that the worst of their loan losses will be over this year.
The UK's largest retail bank helped its shares jump as much as 15 percent with news that conservative provisioning on HBOS, the ailing rival which Lloyds took over in January, means its bad debts have already hit a peak.
The group, now 43-percent owned by the UK taxpayer, said impairment losses rose to 13.4 billion pounds in the first six months, more than five times the year-ago level. Some 80 percent of that stemmed from what it said was an imbalanced HBOS loan portfolio, badly hit by the drop in property prices.
Unlike UK rivals including Royal Bank of Scotland -- set to report on Friday -- retail-focused Lloyds does not have a major investment banking arm benefitting from current conditions to help offset margin pressure and loan losses.
"Consumer impairments and normal corporate impairments -- non-property related -- will peak a year or two after the trough of the recession, but because we have taken a prudent view on the property book, we expect this to be the top of our total impairments," Chief Executive Eric Daniels told Reuters.
Lloyds expects retail impairments to hit their worst in the second half as unemployment rises, but to improve into 2010.
Meanwhile Allied Irish, which saw bad debts jump to 2.37 billion euros ($3.4 billion), echoed its UK rival, saying big writedowns mean it too expects its rate of loan loss provisions to hit the high-tide mark in 2009.
"We do believe that the provision (for bad debts) will peak this year. It's simply a fact of the mathematics. We have gone at it aggressively," Chief Executive Eugene Sheehy said.
News of a peak in bad debts, combined with hopes of further cost savings and margin improvements to come, helped lift Lloyds shares, which closed up 10.6 percent at 93.2 pence, while the DJ Stoxx European banking sector index was up 0.5 percent. AIB was up 8.4 percent at 1.86 euros.
"I am rather encouraged (by Lloyds). What you have is a bit of a line in the sand -- people can really start to look at the underlying operating performance of this bank," analyst Mike Trippitt at Oriel Securities said.
TURNING A CORNER?
Lloyds said 70-80 percent of its bad debts would be included in a government-backed scheme to limit its exposure to losses on bad loans. It is still in talks to agree the detail and terms of the plan, Daniels said, declining to give further details.
Lloyds had agreed a 25 billion pound "first loss" liability as part of the scheme -- meaning its losses in the first six months alone gobbled up 10 billion of that and brought the bank closer to dipping its hand in public pockets once again. Daniels, however, said that the run rate would ease as impairments improved.
Lloyds pretax loss totalled 3.96 billion pounds ($6.7 billion) as the fivefold increase in impairments weighed. Excluding gains on the valuation of its own debt, however, that loss increased to 7.7 billion pounds.
But Lloyds said lower impairment charges would more than offset the pressure on margins, helping it to post improved results in the second half and into 2010. It expects to deliver "high single-digit" income growth within two years.
Lloyds' net interest margin, which came in at 1.7 percent in the first half, is likely to improve in 2010, though not to last year's levels of 2 percent.
LENDING TO BUSINESSES
But Lloyds also said it was meeting government targets to keep lending open, especially for smaller UK businesses. It said on Wednesday that it had met demands partly by reviving lending from HBOS's Bank of Scotland arm, which froze loans last year.
Lloyds agreed to buy HBOS in the depths of the banking crisis last September and weeks later was forced to surrender a 43 percent stake to the government in return for a 17 billion pound bailout.
In its first earnings as a combined entity, Lloyds said it was on track to deliver 1.5 billion pounds run rate annual cost savings by the end of 2011. It gave no details on job cuts.
Following disposals by rivals Barclays and RBS, Lloyds is also widely expected to sell off some of its non-core businesses as it restructures and tailors its portfolio to meet antitrust demands. A report in the Financial Times said it is in advance talks to sell the bulk of fund management firm Insight Investment Management to Bank of New York Mellon, but Daniels declined to comment.
Lloyds expects to run off around 200 billion pounds of assets over the medium term to reduce the balance sheet and reposition itself out of areas where it said there was too much concentration. The move will have a modest impact on income.
For a separate story on commercial real estate, please click on
For a column on Lloyds, please click on
For a column on the Asset Protection Scheme, please click on ($1=.6949 euros) ($1=.5903 pounds) (Editing by Greg Mahlich)