By Max Colchester 

LONDON-- Lloyds Banking Group PLC on Friday reported a rise in first-half profit despite the bank taking a GBP1.4 billion ($2.18 billion) provision to compensate customers who were wrongfully sold insurance products.

The bank, which is 15% owned by the British government, said net profit for the six months came in at GBP677 million, compared with GBP574 million in the same period last year, as impairment charges dropped steeply.

The British retail bank continued to reap the benefits of a resurgent U.K. economy and low interest rates, which has kept loan defaults down. "The U.K. economy will continue to strengthen and we will continue to benefit from this," Chief Executive António Horta-Osório said.

Lloyds confirmed it would pay an interim dividend of 0.75 pence a share and pledged to consider share buybacks or special dividends if it built its capital buffer further. Revenue rose 2% to GBP8.96 billion in the first half and the bank's net interest margin, the difference between the rate at which the bank borrows and lends, increased compared with last year.

The uptick in results came despite the GBP1.4 billion provision to compensate customers who were sold insurance products they didn't need. Payment Protection Insurance was widely sold alongside an assortment of financial products, including loans and credit cards, to cover customers' repayments should they fall sick or lose their job. Lloyds sold an estimated 16 million such policies since 2000, according to its annual report. So far the bank has provisioned GBP13.4 billion to cover PPI claims.

For several years the bank's management has claimed that the number of claimants is on the wane but Lloyds Chief Financial Officer George Culmer on Friday said claims remained "stubbornly high."

Lloyds also put aside another GBP435 million to cover a range of separate issues, including a fine over its processing of PPI complaints.

Meanwhile, the U.K. government is slowly selling down its stake after mandating an investment bank to drip shares into the market. Over the course of the year it has shed a 10% stake in the lender. The government has previously signaled that it intends to sell shares in the bank to the general public. On Friday Mr. Horta-Osorio said he expected the government to fully exit the bank by the end of the year.

Lloyds said it made an underlying pretax profit--which excludes restructuring and other costs--of GBP4.4 billion, up 15% from the same period last year.

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

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