Profits at Lloyds Banking Group were back in the black in the first quarter but the bank has had to set aside more money to cover the mis-selling of payment protection insurance (PPI).
The bank, which is 41% owned by the UK tax payer, said pre-tax profits came in at £288m compared to a massive loss of £3.47bn in the first three months of last year.
This was down 9% compared to the £316m it made in the last quarter of 2011.
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Lloyds said it had seen an increase in the volume of complaints being received following the PPI mis-selling scandal.
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PPI is meant to cover loan repayments if the policy holder falls ill, is injured, or loses their job.
However, some holders later found they could not claim on the policy, some were wrongly told they had to take it as a condition of a loan, while others did not even realise they had been sold it.
Lloyds is setting aside an additional provision in the first quarter of 2012 of £375m to cover claims.
The group was forced to earmark £3.2bn for mis-selling PPI in 2011, so its total has now reached £3.575bn.
In the politically charged area of small business lending, Lloyds said it had increased net lending to small companies by four per cent, compared to a contraction in the market as a whole of four per cent.
The bank said it was on target to deliver on promises to make £12bn of gross new lending to SMEs this year.
Lloyds, which was bailed out by the government in 2009, said it was becoming a safer bank in terms of its business model.
It said its core tier one capital ratio had increased to 11%, up 20 basis points since 31 December 2011.
It has reduced its reliance on international money markets with total wholesale funding reduced to £231.3bn, down eight per cent compared to the end of 2011 and 24% since the same period last year.
It has also cut its loan to deposit ratio to 130% from 135% at the end of 2011.
Bad loans were also improving with impairment charges falling by more than a third to £1.7bn, compared to the first quarter of 2011.
Lloyds said its first quarter figures meant it was confident of delivering on it 2012 financial guidance, despite the challenging macro-economic environment.
"Although our results reflected the subdued UK economic environment, the actions we have taken to further reduce costs, strengthen the balance sheet and reduce risk, and the additional investment we have made in our core franchise, are mitigating these effects and will position us well for future growth," said chief executive Antnio Horta-Osrio.
