Lloyds Banking Group said today that its recovery was ahead of plan as it swung out of the red with half-year profits of £2.1billion in an impressive turnaround on losses of £456million a year earlier.

The marked improvement came as taxpayer-backed Lloyds slashed costs further and saw a 43% plunge in bad debts, to £1.8bn in the six months to June 30.

But the group revealed another £450m to cover compensation for mis-selling of payment protection insurance (PPI), taking its total bill to a mammoth £7.3bn.

Lloyds revealed it was also under investigation by the Financial Conduct Authority (FCA) over its management of a supplier and PPI complaints handling procedure.

This follows recent reports uncovering evidence of potential bad practice in its PPI complaints handling.

Lloyds, which was fined £4.3m in February by the City watchdog after up to 140,000 customers had their PPI compensation payments delayed, said it was “disappointed” by the FCA probe and has set aside £50m to cover administration costs for the investigation.

“We will work with the FCA to resolve the issues and ensure our customers’ complaints are addressed efficiently and fairly,” it added.

The group’s return to bottom line profits is expected to see the Government fire the starting gun on the sale of its 39% stake in the bank, with the Treasury thought to be working on an accelerated placing of a 10% stake with institutional investors.

Lloyds flagged up another milestone in its return to health today as it said it would hold talks with regulators in the second half of 2013 over a timetable for reviving shareholder dividend payouts.

It has not paid a dividend since its £20.3bn state bailout in 2008, at the height of the financial crisis.

Shares leapt 5% higher to just under 72p following the bullish half-year report, taking the stock further above the 61p level at which the state would break even on its bailout.

Antonio Horta-Osorio, chief executive of Lloyds, said: “In the two years since we set out our strategic plan to become the best bank for customers, we have transformed the group with increasing momentum.”

He added the group had delivered many of its key recovery targets ahead of expectations.

“As a result of the work we have done over the last two years, our performance is not only much improved, but is now more stable and resilient,” he added.

On an underlying basis, its half-year pre-tax profits almost trebled to £2.9 billion from £1 billion a year earlier.