LONDON, July 27 (Reuters) - Lloyds Banking Group's biggest half-year profit in eight years and an increase in interim dividends was clouded by ongoing misconduct charges, as the lender reported its first set of results since the bank exited government ownership.
Britain's largest retail bank reported Thursday a statutory pretax profit of 2.5 billion pounds ($3.28 billion) on Thursday, about 4 percent higher than last year.
The modest increase in profit, which was below analyst expectations, was driven by higher revenues. But it was tempered by a higher-than-expected bill for compensating customers mis-sold loan payment insurance in what is Britain's costliest consumer scandal.
The bank set aside a further 700 million pounds to compensate people mis-sold the insurance policies, nine months after saying it had hopefully drawn a line under the issue.
Lloyds, seen as a bellwether for the British economy, said although the economy remains resilient it is starting to tighten lending standards in consumer finance.
Earlier this week, the International Monetary Fund downgraded its 2017 economic outlook for Britain by more than any other rich nation.
Lloyds said the new charge to compensate customers mis-sold loan insurance should be the last major provision until the end of the claims deadline in 2019.
This was another blow to Lloyds whose earnings for years have been drained by costs related to conduct issues and takes the bank's total cost to cover the mis-selling of payment protection insurance to about 18 billion pounds.
Lloyds also agreed to pay 283 million pounds in compensation to mortgage customers who incurred fees after they fell behind with their mortgage payments.
Total income rose 4 percent to 9.3 billion pounds.
Lloyds said it would pay an interim dividend of 1 pence per share, up 18 percent on last year.
The bank said its net interest margin - the difference between the interest it gets from borrowers and what it pays savers, a key revenue driver had widened to 2.82 percent from the last quarter. ($1 = 0.7614 pounds) (Reporting By Andrew MacAskill; Editing by Rachel Armstrong)