State-backed Lloyds Banking Group has added £1.4 billion to its bill for compensating customers mis-sold payment protection insurance.
However, Lloyds was still able to report a 38% rise in pre-tax profits for the first half of the year to £1.19 billion and announce a 0.75p shareholder dividend, amounting to £535 million.
The Treasury’s stake in the lender rescued by the taxpayer at the height of the financial crisis has shrunk to less than 15% in recent months.
Chief executive Antonio Horta-Osorio said: “Today’s results demonstrate the strong progress we have made in the first half of the year.”
Lloyds revealed it took a £660m charge on the disposal of its stake in TSB, which is being bought by Banco de Sabadell of Spain.
Underlying profit stripping out one-off items rose 15% to £4.38bn.
The lender also remains hampered by issues from the past such as PPI.
Its bill for the mis-selling scandal has now risen to £13.4bn but it could have to set aside another £3bn if complaints don’t decrease significantly.
“We are disappointed to announce further provisions today, but we do so from a position of financial and capital strength,” Mr Horta-Osorio said.
The bank also took an additional £435m hit for other misconduct provisions, including a £117m settlement with the Financial Conduct Authority over its handling of PPI complaints and £175m for mis-selling packaged bank accounts.
However, Mr Horta-Osorio said the bank had continued to benefit from the improvement in the UK economy as it offered improved full-year guidance on margins and said it expected lower charges from bad loans.
Lloyds also cheered small investors by raising the prospect of special dividends.
The move is expected to make the stock more attractive for a “Tell Sid” style sell-off to ordinary retail investors.
Mr Horta-Osorio said Lloyds was on track for full privatisation in 12 months.
He said the process of “dripping” shares into the market, which had resulted in the disposal of around 10% of its capital being disposed of in around six months without any discount needed, was “shrewd”.
Shares in Lloyds closed down 3.21% at 83.26.