Lloyds Banking Group posted a bigger than expected loss last year after setting aside billions to compensate customers who were mis-sold payment protection insurance and said the government could be getting close to selling some of its 39 percent stake.

Britain's biggest mortgage lender said its full year statutory loss was £570m ($865m/€662m) after setting aside £3.575bn - including £1.5bn in the final three months of the year - to settle potential payment protection insurance claims. The 2011 loss was £3.5bn. Underlying profit, however, tripled from £638m to £2.607m, the bank said in a statement published Friday on its website. A further £400m was set aside for small business customers who were mis-sold interest rate swap agreements.

'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," said CEO Antonio Horta-Osorio in the statement. "Since setting out our strategy in June 2011, we have significantly strengthened the balance sheet, and substantially improved efficiency and focus, while continuing to work through legacy issues. We are investing in our simple, lower-risk, customer-focused UK retail and commercial banking model, and in value-for-money products and better capabilities to continue to support UK households, businesses and communities."

Finance Director George Culmer told analysts on a conference call after the results that the bank's "absolute focus" was to return money to the UK taxpayer.

Lloyds' shares fell as much as 8.5 percent in London trading to change hands at 49.96 pence each, wiping out nearly all of the 2013 gain.

The bank's core tier one capital ratio, a measure of the amount of cash the bank needs to set aside to protect savers and shareholders from potential losses, improved to 12 percent, the bank said. The amount of bad loans the bank continues to carry on its books was reduced by 42 percent over the full year, Lloyds reported, to £5.7bn.

Lloyds's bonus pool for the year will be £365m, the bank said, compared to £607m for state-owned RBS. CEO Horta-Osorio was paid a deferred £1.5m in shares, which will deferred for five years and will vest at either 73.6 pence each or if the government sells at least 33 percent of its stake at a price higher than 61 pence. The government's 39 percent holding, which cost around £20bn in 2008, is measured at an average price of 73.6 pence.