The fortunes of Britain’s biggest banks have undergone a startling turnround, with profit growth at the state-backed Lloyds Banking Group set to eclipse that of the former industry star Barclays when they reveal their first-half results next week.

The resurgence of Lloyds, which is expected to post a profit of about £1bn for the first half, will bolster the position of Eric Daniels, the bank’s chief executive, who narrowly escaped a botched attempt to oust him in the spring.
Mr Daniels has since secured the backing of the bank’s board, its chairman and UK Financial Investments, which oversees the government’s 41 per cent stake, to stay in his job indefinitely. “Everyone sees that he’s a good operator,” said one person familiar with UKFI’s thinking.

Mr Daniels has come under fire since he helped engineer Lloyds’ controversial purchase of HBOS in 2008 but has refused to step aside.

Sir Win Bischoff, Lloyds’ chairman, now echoes Mr Daniels’ insistence that there is no timetable for the chief executive’s retirement. People close to Mr Daniels say he wants to stay for at least two years.

Lloyds’ return to profitability in the first half starkly contrasts with almost £4bn of losses in the same period last year. It has been driven by a forecast drop of more than 50 per cent in bad debts. Weaker competition has also allowed lenders to push through higher prices.

The trend in falling loan losses will also be evident at Royal Bank of Scotland, Barclays and HSBC, although it will be offset by a washout second quarter for investment banking.

Barclays Capital, the bank’s former growth engine, may be a big victim of the slowdown, with some analysts expecting a near halving of top-line revenues in recent months. Overall, Barclays is expected to announce underlying pre-tax profits of about £3.5bn, up from £2.75bn a year ago.

Analysts expected the difficult market conditions for investment banks to have slowed the pace of restructuring at RBS, although the bank hopes to announce the sales of its retail branch network and its payments processing business with its results, which could net in excess of £3bn.