TAXPAYER-backed Lloyds Banking Group revealed a dip in third-quarter profits yesterday and warned it is in danger of missing its medium-term targets.

Lloyds, which is 41% owned by the Government, said underlying profits fell 21% to £644m in the three months to September 30 after being hit by weaker demand for loans and higher wholesale funding costs.

The weak third-quarter performance meant the group made bottom-line losses of £3.9bn in the nine months to September 30 after taking a £3.2bn hit to cover its mis-selling of Payment Protection Insurance. Lloyds, which recently revealed that chief executive Antonio Horta-Osorio is on sick leave, said the weak state of the economy could mean its medium-term recovery targets are pushed back to “beyond 2014”.

But it benefited from a significant reduction in its impairment charge for bad loans, which fell to £2bn in the third quarter from £2.8bn in the previous quarter.

The bigger-than-expected fall in the third quarter meant impairments in the first nine months were £7.4bn – 22% lower than a year ago.

Its total income was down 9% to £16.1b in the first nine months of the year as demand for loans fell and its margins are squeezed by competition from other lenders.

Lloyds said its performance was resilient given the weakening state of the UK economy over the third quarter of this year.

It said the group’s performance reflects “the subdued UK economic environment”, its strategy of reducing its riskier loans and higher wholesale funding costs caused by the eurozone debt crisis.

And it claimed it is on track to deliver its targets for lending to small businesses having provided £9.6bn in the first nine months.