British taxpayers are sitting on a 3.5 billion pound ($5.6 billion) paper profit on its stakes in Royal Bank of Scotland and Lloyds after both swung back to profit, driving their shares higher.

 Britain’s profit could be more than five times that amount — potentially bringing in much needed income for the cash-strapped UK government.

 “It now looks like the government’s huge bank bailout, far from costing the taxpayer money, will yield a 19 billion pound profit,” said Doug McWilliams from the Center for Economics and Business Research.

 His estimate was based on shares rising in line with nominal GDP and the stakes being sold over the next five years. If RBS and Lloyds extend their revival the profit will be even higher from the much criticised bailouts.

 Britain pumped 66 billion pounds into the pair in 2008 and 2009 to hold an 83 percent stake in RBS and 41 percent of Lloyds.

 RBS shares rose 2.4 percent to 53.3 pence on Friday after it said it had swung to a 1.6 billion pound operating profit in the first half, from a 3.4 billion pound loss a year ago.

 The government paid an average of 50.2 pence for each of its 90.6 billion RBS shares during a series of transactions to rescue it from collapse, leaving the state with a current 2.7 billion pound paper profit.

 Lloyds shares have jumped 10 percent this week to 76.2 pence, above the government’s average purchase price of 73.6 pence for its 27.6 billion shares. Lloyds halted two years of losses with a first-half profit of 1.6 billion pounds. However, it is likely to be some time before UK Financial Investments, the body that holds the stakes, will start realising a profit.

 Britain has appointed a Banking Commission to investigate competition in the industry and consider splitting retail and investment banking, and UKFI is not expected to sell its RBS or Lloyds holdings until the outcome is clearer next year.

 “As far as we’re concerned they can start reducing tomorrow morning,” Stephen Hester, RBS chief executive, said on Friday, but added the Banking Commission inquiry “may put some constraints on timing.”

 “We are trying as hard as we can to put them in a position where they can profitably sell. We hope they will, we think it’s to everyone’s advantage — RBS will see progress as we wind back the state support and the government will see a closing of its budget deficit, which is highly desirable for all the reasons we know about,” he told reporters on a conference call.

 The government also fully owns smaller lenders Northern Rock and Bradford & Bingley. Their performances have also improved and could see the “good bank” part of Northern Rock sold before the RBS and Lloyds stakes.

(c) Copyright Thomson Reuters 2010.