Part-nationalised British bank Lloyds swung back into profit last year after a recovery in its core UK retail banking operations absorbed a £4 billion hit on bad debts in Ireland.

Lloyds, Europe's fifth biggest bank by market value, made a pretax profit of £2.2 billion, £300 million ahead of the average market forecast, having lost £6.3 billion in 2009.

Losses on bad loans fell 45 per cent to £13.2 billion thanks to a "slowly improving economic environment", but the bank said that improvement had been capped by its problems in Ireland, which worsened in the last quarter of the year.

"While we were disappointed by the increases in the international portfolios, these reflect specific economic challenges facing Ireland, and to some degree Australia, which we are managing closely," the company said.

In Ireland, bad loans rocketed to £4.3 billion from £2.9 billion in 2009.

Lloyds is 41 per cent owned by the UK government after being bailed out during the credit crisis when it was saddled with billions of pounds of losses from its takeover of troubled rival HBOS in 2008, a deal brokered by the Labour government of the time.

Reuters