By Max Colchester 

LONDON-- Lloyds Banking Group PLC on Friday said it would pay its first dividend since the U.K. lender was bailed out during the financial crisis.

The bank, which is 23.9% owned by the U.K. government, swung to a GBP1.13 billion ($1.74 billion) net profit for 2014, compared with a net loss of GBP838 million a year earlier, buoyed by falling costs and an improving British economy. Lloyds's board received clearance from regulators to recommend a dividend of 0.75 pence a share for 2014, its first for nearly six years.

Lloyds Chief Executive António Horta-Osório hailed the proposed dividend payment as a symbol of the bank's return to normality following a traumatic few years. "Over the last four years we have transformed Lloyds Banking Group into a low cost, low risk U.K. focused retail and commercial bank," he said.

Many analysts had expected Lloyds to propose a dividend of 1 pence. "What really matters today is that we started," said Chief Financial Officer George Culmer. The executives said the bank intends to pay a dividend of 50% of sustainable earnings in the medium term.

In 2008, Lloyds was bailed out following a shotgun merger with teetering mortgage giant HBOS. It has since slashed its balance sheet and refocused on its British activities. The U.K. government has gradually reduced its holding in the lender from around 40%. The proposed dividend will return GBP130 million to the government.

In 2014, the bank's total income, excluding insurance claims, fell 2% from a year earlier to GBP18.37 billion. Analysts were concerned that the bank's net interest margin--the difference between its cost of borrowing and the interest it charges customers--fell in the last three months of the year compared with the quarter before. The bank's underlying profit, which strips out a number of one-off items, came in at GBP7.8 billion, compared with GBP6.2 billion a year earlier.

Old problems continue to haunt the lender. The bank said it put aside GBP700 million in the last quarter to compensate customers who were wrongfully sold payment protection insurance.

Lloyds is also bracing for a wave of criticism on executive pay. Mr. Horta-Osório walked away with a package worth GBP10.8 million in 2014 after a large long-term incentive share award came due. "I intend to keep these shares until the government's stake is significantly reduced," he said.

The U.K. Treasury chief George Osborne said in a statement that he welcomed the Lloyds dividend, and that "all proceeds from these sales are being used to reduce the national debt."

Write to Max Colchester at max.colchester@wsj.com

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