Lloyds Banking Group has moved closer to repaying the U.K. taxpayer's investment in it after reporting better-than-expected profits for 2013 - but has set aside another £1.9 billion to pay off mis-selling settlements.
Shares in the group fell 2.5 percent in early trade, making it the sharpest faller on the FTSE index.
The U.K. bank, which is part-owned by the U.K. state, rushed out a statement Monday morning, ahead of results expected next week, announcing that its group underlying profit would come in at £6.2 billion for 2013, better than analysts were expecting and double the previous year's results.
Lloyds has set aside a further £1.8 billion to pay off customers who were mis-sold payment protection insurance, and another provision of £130 million to recompense small and medium-sized businesses who were mis-sold interest rate hedging products.
The improvement in results means that the government, which has already begun selling off its stake in the bank, may be closer to the point at which it can make a profit on its shares. António Horta-Osório, chief executive of Lloyds, told reporters that the timetable of the share sale would be set by the government.
George Culmer, the bank's finance group, told reporters that a future share price sale would not take place until after full audited results for 2013 in March.
Horta-Osório said that the rise in profits was driven by increased lending, particularly to businesses.
"What's important is that our core loan growth has accelerated to 3 percent year-on-year," he said.
Lloyds seems to be inching closer to the time when it will be able to repay the U.K.'s taxpayer-funded bailout. After discussions with U.K. regulators, the bank is now aiming to start paying a small dividend again in the latter half of 2013.
The bank confirmed that it will make a small statutory profit before tax in 2013, and that its tier 1 capital ratio (a key measure of financial health) was 10.3 per cent at the end of 2013, as expected by the market.
- By CNBC's Catherine Boyle. Twitter: @cboylecnbc.