Lloyds Banking Group reported weaker than expected third-quarter results today, a setback for Britain's finance ministry which is planning to return the bank to full private ownership next year.
Lloyds, Europe's second-biggest bank by market value, also set aside another £500m to compensate customers mis-sold loan insurance.
This brings its total compensation bill to nearly £14 billion, more than double that of any other UK bank.
Lloyds was rescued with a £20.5 billion taxpayer-funded bailout during the 2007-09 financial crisis, leaving the UK government holding 43%. It has since reduced its holding to less than 11%, raising over £15 billion.
The UK government is planning to sell at least £2 billion worth of shares in Lloyds next spring to return the bank to full private ownership.
Lloyds said today that its underlying pretax profit fell to £2 billion from £2.2 billion a year ago. Analysts polled by Reuters had expected the result would be unchanged from last year.
Total income fell 4% to £4.2 billion, also below forecasts, as the bank said the performance of its commercial banking division was hit by tougher trading conditions and income was lower in its insurance business.
Lloyds' bill for compensating customers mis-sold payment protection insurance (PPI) rose to £13.9 billion.
The policies, designed to protect borrowers in the event of sickness or unemployment, were found to have often been sold to people who would have been ineligible to claim.
Britain's financial regulator said in October it intended to set a 2018 deadline for people to claim compensation, a decision seen as positive for Lloyds, but finance director George Culmer said the deadline should be brought forward.
"We think two years is excessive. We think that a shorter time bar will actually get people to act more quickly and get receipt of their money more quickly," Culmer said.
Lloyds also set aside another £100m to cover potential claims relating to other products sold by staff.
