Lloyds returns to profit, bonus pool $655 million

PPI provisions are 'massive' hit for Lloyds

State-backed Lloyds Banking Group has swung back into profit, delivering a £1.7 million ($2.8 million) bonus for its chief executive despite amassing £10.3 billion in misselling provisions in the last three years.

Chief executive António Horta-Osório said it was right to accept his bonus – and to increase the wider £395 million bonus pot for Lloyds' 91,000 staff. The average £4,500 represents an 8 percent uptick on last year, something Mr Horta-Osario said was conservative given the exponential improvement of the bank's performance.

"I think you should link compensation to performance. The group has made excellent progress and our share price is up 70pc in the year – significantly better that all of our peers. We are the best performing of the top 50 banks in the world over the last 24 months. Given this performance, the government is in a position to sell down its stake.

(Read more: Lloyds share sale closer after profit hike)

"We are," said Mr Horta-Osario, "becoming a normal bank again.

"Therefore I will take this bonus because I think it will align my interest with shareholders and that includes the taxpayer."

Lloyds, which has more retail banking customers than any other bank in the U.K. needed a £20 billion pound bailout at the height of the financial crisis in 2008. The bank and the U.K. coalition government have since been working to sell off the state's stake.

The multimillion-pound deal is contingent on Mr Horta-Osario overseeing the government's exit, below 50 percent of the bank's share capital.

"I came here to the bank to fix the bank. If,in five years'time, these conditions haven't been met, I won't get an award and later it can be clawed back."

Leading investors, who are all very supportive of the Portuguese boss, said that they were less pleased with the amount of provisions the bank is still having to announce for the misselling of payment protection insurance (PPI) on customer loans.These latest results revealed a fourth-quarter provision of £1.8bn.

One top 10 shareholder told CNBC that the recent PPI sting had come as a "shock" and a "massive disappointment".

"We had hoped that a line was being drawn under these jumbo claims," said another investor.

In total, Lloyds has been forced to put aside £10.3 billion in provisions for PPI misspelling and interest rate swap misspelling to its customers, which the bank said had been taken into consideration when increasing the bonus bool by just 8 percent.

However, the PPI pay-outs to customers subdued Lloyds' stellar underlying profits of £6.2 billion leaving it with just £415 million in pre-tax profits compared to a £606 million loss for 2012.

"It is really crap , I'm not sure what else I can say," said one frustrated top 10 shareholder.

Chris Ratcliffe | Bloomberg | Getty Images

"We thought this type of provisioning was in the past, but clearly that is not the case. In my best judgment, I assume that now at least, these big numbers are out of the way, especially given the push for a retail offering to offload the Government stake. But I thought the same last year and clearly, I was wrong."

(Read more: Ax falls across UK banking sector)

The bank said work had progressed well on the prospectus for its second share sale which is likely to be offered to the general public. Lloyds said that it would apply to the regulator in the second half on 2014 to restart dividend payments and move to a dividend payout ratio of at least 50 percent of sustainable earnings in the medium term. This strategy would prove a huge success for George Osborne's privatization plans ahead on the next election.

However,the Prudential Regulation Authority, the Bank of England-run banking watchdog, could find it hard to grant the bank's request – even if it does post healthy half-year numbers – if there are any doubts about the size of provisions on the horizon.

The bank's capital position has jumped from 8.2 percent to 10.3 percent, with the finance director saying there had been 2.2 percent of capital generation in 2013.

Mr Horta-Osario said that the bank was growing its market share by 3 percent in lending despite it shrinking 1 percent a year. He added that he expected this loan growth to continue in line with the UK's economic recovery, which the Bank of England said would be 3.4 percent this year. He also admitted that the lender would need to hold more capital to support the expanding loan book.

On the forthcoming Scottish independence referendum, the Lloyds' CEO said the decision was for the Scottish people and those in the UK. If the referendum delivered a "Yes" vote, then the bank would look at what it needed to do in the intervening 18 months before independence was granted.

Finally, the bank's finance director admitted that Lloyds would not recover the £1.6 billion it cost to strip out TSB branches after the bungled sale to the Co-op bank was aborted.

George Culmer said the initial public offering for the 631-branch TSB was on track for the middle of this year but that "you will not recover the £1.6 billion in terms of any IPO proceeds".