Due to what it said was the impact of a £585 exposure to bad mortgage debts and risky assets Lloyds TSB yesterday reported a 70 per cent drop in its first-half profits.

Although it was the first UK bank to announce interim results, it showed its core capital ratio fell below expectation, provoking concerns about further mortgage impairment before the year runs out.

The bank, which is the country’s fifth largest, saw its shares crashing by 2 per cent to 316p by yesterday morning.

As impairment losses in the first half increased by 31 per cent to £1.1 billion, there were fears that mortgage arrears would keep rising.

Earlier, Lloyds had predicted that the prices of house would fall by 10 to 15 per cent this year, adding that it could make bad debts rise by up to £100 million in the second half of the year.

House prices, it said further, could fall five per cent more in 2009.