Lloyds Banking Group Plc, Britain’s largest mortgage lender, said it will resume dividend payments after reporting its first annual profit in five years.

Net income was 1.5 billion pounds ($2.3 billion) compared with a 838 million-pound loss a year earlier, the London-based lender said on Friday. That missed the 1.8 billion-pound average estimate of 16 analysts surveyed by Bloomberg after the bank took a 700 million-pound charge for improperly sold payment protection insurance products in the fourth quarter, taking total provisions for 12 billion pounds.

Chief Executive Officer Antonio Horta-Osorio, 51, has cut thousands of jobs and shrunk the bank’s retail network to help return the lender to private ownership. Strengthening economies in the U.K. and Ireland helped bolster earnings, though the CEO’s efforts have been hampered by record provisions for the PPI products customers didn’t want or need.

“Earnings were a bit weaker than anticipated because they took an extra charge for PPI, and the dividend is smaller than the market anticipated, but it was always going to be a small, token effort anyway,” said Gary Greenwood, an analyst at Shore Capital Group Ltd. in Liverpool, England, who rates Lloyds hold. “It’s more significant that they actually resumed payments.”

The shares rose 1.8 percent to 79.9 pence at 8:18 a.m. in London, the second-best performance in the Bloomberg Europe Banks and Financial Services Index. Lloyds has gained about 5 percent this year.

Margin Target

Lloyds will pay a dividend of 0.75 pence a share, its first payout since taking a bailout in the financial crisis. Horta-Osorio said the bank plans to eventually pay 50 percent of its earnings out in dividends.

Though it’s “obviously disappointing” to have to make additional provisions for PPI, “reactive complaints continue to come down,” Chief Financial Officer George Culmer said on a conference call.

Underlying profit, which excludes items such as customer redress and restructuring charges, rose 26 percent to 7.8 billion pounds from a year earlier. The bank aims to cut costs to 45 percent of income by 2017 from the 51 percent last year.

Culmer said he’s confident of meeting the bank’s 2.55 percent target for net interest margin in 2015. The measure of profitability stood at 2.47 percent in the fourth quarter.

Government Stake

“Our profitability and capital position have improved significantly,” Horta-Osorio said in the statement. “While we recognize we have more to do, we enter the next phase of our strategy from a position of strength.”

The U.K. government said earlier this month it had sold 500 million pounds of Lloyds shares under a plan to reduce its stake in the lender ahead of general elections in May. It now owns about 24 percent of the lender.

Lloyds’s earnings and dividend are a “major milestone” in the U.K. recovery, Chancellor of the Exchequer George Osborne said in an e-mailed statement. The government will receive at least 100 million pounds from the dividend, he said.

Horta-Osorio said on the conference call that he would keep all of his shares until the government “significantly” reduces its stake in the lender. He received a long-term share award valued at up to 1.83 million pounds that will vest in 2018, and his base salary was unchanged at 1.06 million pounds for this year.

(Source: Bloomberg)