UK banking group Lloyds saw underlying profits soar in 2012 but was forced to take further provisions for Payment Protection Insurance (PPI) redress in the fourth quarter.

Underlying profit increased from £638m to £2.61bn last year, as costs reduced by 5.0% to £10.1bn. This cost reduction was in line with the strategic review target but two years ahead of plan.

However, the company registered a statutory loss of £570m for 2012, mainly due to PPI provisions totalling £3.58bn, £1.5bn of which was booked in the fourth quarter alone. The bottom line also includes £3.21bn of gains from sales of government securities.

Chief Executive António Horta-Osório said: "The substantial progress we made in 2012 means that we are now ahead of our plan to transform the group, and this was reflected in our stronger underlying financial performance in the year."

He said that since the bank's strategy was set out in June 2011, it has significantly strengthened the balance sheet, improved efficiency an focus while continuing to work through "legacy issues".

Strong capital generation meant that the core-tier one capital ratio increased to 12.0%. Capital ratios were helped by the continued non-core asset reduction of £42.3bn during the period, some £17bn more than the initial guidance.

"We are creating a business of which customers and colleagues can be proud of, and which I am confident will help Britain prosper, and deliver strong, stable returns to shareholders," he said.

2013 outlook

As for the current financial year, the company said that costs are expected to fall further to £9.8bn.

Underlying profits are expected to increase further due to the improvement in portfolio quality and a substantial reduction in impairment charges.

Furthermore, Lloyds expects to reduce the non-core asset base by at least £20bn in 2013, putting it on track to achieve its target of a non-core asset portfolio of £70bn or less by the end of next year.

Bonus pool

The total bonus pool at the bank for 2012 was £365m, down 3.0% year-on-year. The company said that the reduction was applied to a greater degree to senior staff.

The average value of bonus per employee was £3,900, similar to 2011.

Horta-Osório was awarded a £1.5m bonus in deferred shares for his work in 2012. The shares will not be released until 2018 and depend on Lloyds' share price at the time and the price of the government's sale of company stock, the remuneration committee said.

"The board believes that these additional conditions are in the interests of all shareholders and support our common aim of repaying the taxpayer," Lloyds said.

Related share prices
Lloyds Banking Group (LLOY) share price