LONDON (AP) — Britain's part-nationalised Lloyds Banking Group said yesterday that it turned a profit in the first quarter — and expects one for the full year — as the rate of impairments on bad loans slowed.

The report was a further sign of recovery at Lloyds and Royal Bank of Scotland, both bailed out by taxpayers at the height of the financial crisis. Shares in those banks are now trading above the value the government paid for its stakes.

In a statement, Lloyds said provisions for bad loans were lower in both its retail and wholesale divisions.

"I think the return to profitability shows the banking system is stabilising," said Treasury chief Alistair Darling, who was on the election campaign trail in Wales.

"The economy is recovering but it's still fragile. We are not out of the woods yet."

Lloyds, created from the merger of Lloyds TSB and Halifax/Bank of Scotland, said it was also making good progress on integration savings, and expects to achieve £2 billion ($3.1 billion) worth of synergies and other savings by the end of next year.

The government currently holds a 41 percent stake in the bailed-out company.

Lloyds shares were up 3.9 percent at 72.96 pence in early trading on the London Stock Exchange, but fell back below 70 pence at midday. The stock has risen from a low point this year of 46.58 on February 12.

"Investors may be looking at Lloyds anew," said Richard Hunter, analyst at Hargreaves Lansdown Stockbrokers.

However, "the overhang of the government stake will remain a technical drag on the shares, whilst the bank is still largely tied to the fortunes of the UK economy," Hunter said.

Danny Clarke, analyst at Shore Capital Stockbrokers, cautioned that Lloyds still had some distance to go in its recovery.

"While momentum is certainly with the stock, we believe Lloyds still faces considerable challenges in returning to full health and delivering the target returns needed to justify further share price upside including right-sizing the balance sheet, reducing its reliance on Treasury facilities and heightened regulation and capital requirements," Clarke said.