State-backed Lloyds Banking Group has added £1.4 billion to its bill for compensating customers mis-sold payment protection insurance (PPI).
But 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 dividend for shareholders, 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.
"We remain focused on our aim to become the best bank for customer sand shareholders while at the same time supporting the UK economy."
The lender remains hampered by issues from the past such as PPI. Its bill for the mis-selling scandal has now risen to £13.4 billion.
It also took a £660 million charge on the disposal of its stake in TSB, which is being bought by Spain's Banco de Sabadell.
Underlying profit stripping out one-off items rose 15% to £4.38 billion.
Lloyds said PPI complaints were falling at a slower rate than expected. It is assuming a significant decrease over the next 18 months but without this it would have to add £3 billion to its provisions over the scandal.
Mr Horta-Osorio said: "We are disappointed to announce further provisions today, but we do so from a position of financial and capital strength."
The bank also took an additional £435 million hit for other misconduct provisions, including £117 million for a previously-announced settlement with the Financial Conduct Authority (FCA) over its handling of PPI complaints.
It also included £175 million set aside for complaints over the mis-selling of packaged bank accounts - products where customers pay a fee in exchange for benefits.
Lloyds said that in PPI, reactive complaints are being driven by claims management companies.
Mr Horta-Osorio said the bank would prefer customers to complain directly to it so that compensation goes directly to consumers. He made favourable comments about the idea of a time bar on complaints.
He said: "We think that with a proper timeline, given that practically everyone in the UK is aware of PPI, this would be a proper thing."
Meanwhile, Mr Horta-Osorio said the bank 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.
He added that the lender was undergoing a "digital revolution" with more than 11 million online users and nearly six million using its mobile services.
Lloyds also cheered its army of small shareholders by saying that having now resumed dividend payouts it will now consider using any excess capital to distribute special dividends.
This is expected to make the stock more attractive for a "Tell Sid" style sell-off to ordinary retail investors that is being planned, likely to come at the end of the continuing return to the private sector.
Mr Horta-Osorio said Lloyds was on course to be fully privatised in the next 12 months.
He said the current 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".
But he said he understood the "political commitment" to a wider retail offer.
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