Lloyds Banking Group said its HBOS unit made a hefty loss last year.
Bad loans wiped nearly a third off the group's stock market value.
In a statement on Friday, Lloyds said HBOS had a pretax loss of Stg 8.5 billion ($US12.28 billion) for 2008. This included Stg 7 billion in bad corporate loans. A further Stg 4 billion of assets were written-downs.
HBOS was bought by Lloyds TSB in September last year. The deal was brokered by the British government.
The group is 43% owned by the British taxpayer.
Chief executive Eric Daniels said in a statement that the merger would prove profitable in the long run.
Lloyds TSB unit made a profit of about Stg 1.3 billion pounds, including write-downs of about 1.3 billion pounds.