Part-nationalized Lloyds Banking Group unveiled a 10 billion pound ($14.28 billion) loss for 2008 and said it had not finalized a plan to put billions of pounds of assets into a UK government-backed insurance scheme.
Lloyds said on Monday talks with the UK government on the asset insurance scheme were well advanced and Chief Executive Eric Daniels told Reuters he would provide an update reasonably shortly.
But he declined to comment on how much would be put into the scheme while he was in the middle of negotiations.
The Lloyds CEO also defended Lloyds TSB's acquisition of rival HBOS in January, seen by some investors as having exposed conservatively-run Lloyds to bad debts and asset write-downs at HBOS.
I think it's a very good deal, I think it'll prove to be a seminal event in the history of Lloyds, he said.
Lloyds had been expected to announce it was putting over 250 billion pounds of risky assets into the government-backed scheme, aimed at protecting banks from further falls in the value of their credit-related assets.
By 7:15 a.m. EST Lloyds shares were down 20 percent at 59.7 pence, giving up some of their 31 percent surge on Thursday when they were helped by optimism that terms of the plan would be more favorable than earlier expected.
They haven't managed to conclude a deal on asset protection, and we think the uncertainty will lead to disappointment, said Simon Willis, analyst at NCB Stockbrokers.
The so-called asset protection scheme launched by Britain's Treasury on Thursday is expected to insure well over 500 billion pounds worth of assets by the time other banks have signed up.
Lloyds said the outlook remained tough and the short-term outlook for the enlarged group is challenging.
Impairments will continue to run at high levels, especially in the higher risk parts of the legacy HBOS portfolios, it said.
In a conference call with analysts, Lloyds Finance Director Tim Tookey warned that the group was set to make a further loss this year as rising unemployment and falling house prices push up bad consumer loans.
We expect the group to report a loss in 2009 before accounting for goodwill, Tookey said.
BIG HBOS LOSS
HBOS -- the mortgage lender Lloyds took over in January -- suffered a 2008 statutory loss of 10.8 billion pounds, hit by 9.9 billion pounds of losses on soured corporate loans, rising homeowner bad debts and credit market exposure.
The former Lloyds TSB business made a statutory profit of 807 million pounds, down from 4 billion pounds, as its impairments jumped to 3 billion pounds.
HBOS's loss was in line with guidance Lloyds gave two weeks ago in a profit warning. It indicates that the combined group made a statutory loss of 10.1 billion pounds, compared with a combined profit of 9.4 billion in 2007.
News of HBOS' deficit came a day after rival Royal Bank of Scotland reported a 24 billion pound loss, the biggest in UK corporate history, and said the government's stake could rise as high as 95 percent as it put 325 billion pounds of assets in the UK protection scheme.
Lloyds agreed to buy HBOS in September after the owner of the Halifax neared collapse due to its overdependence on wholesale borrowing. The government facilitated the deal by exempting it from competition rules.
Now rising corporate and home loan bad debts are creating problems for the enlarged bank as the British economy deteriorates, stoking criticism of the deal and raising concern the bank may need to raise more capital.
Lloyds is 43 percent owned by the government after Lloyds and HBOS received a total of 17 billion pounds in public money as part of a government bailout of the banking sector in October.
The enlarged bank's core tier 1 ratio was 6.4 percent at the end of 2008.
(Editing by Jon Loades-Carter)