Lloyds Banking Group has reported a surge in its half-year profit as it continued to benefit from higher borrowing costs.

The British banking giant said it made a statutory pre-tax profit of £3.9 billion in the six months to the end of June, 23% higher than the £3.1 billion reported the same time last year.

It was driven by a boost in the bank’s income and a higher net interest margin – which shows the difference between what it earns from loans and pays out for deposits.

However, the banking group – which owns Lloyds Bank, Halifax and Bank of Scotland – saw its financial performance begin to slow in recent months.

Its second-quarter profit hit £1.6 billion, down 29% from the £2.3 billion reported in the first quarter, but in line with the same period last year.

Furthermore, it set aside an impairment charge of £662 million in the latest half-year to cover expected losses from bad loans.

UK mortgage holders falling into arrears increased in the latest period, Lloyds revealed, indicating that more borrowers have struggled with higher repayments as interest rates have risen.

Charlie Nunn, group chief executive of Lloyds, said: “We know that rising interest rates, cost-of-living pressures and an uncertain economic outlook are proving challenging for many people and businesses.

“The group delivered a robust financial performance in the first half of 2023 with strong net income and capital generation alongside resilient asset quality.

“We continue to make good progress on delivering our strategic initiatives. Combined with our franchise resilience, this better positions us to support our customers, both today and in the future.”