Lloyds Banking Group is paying its first dividend in more than six years after reporting a rise in profit and improvements in its capital strength, a milestone in the bank’s recovery after it was bailed out during the financial crisis.

The bank, which was rescued at a cost of £20 billion to British taxpayers, said it would pay a dividend of 0.75 pence for the 2014 financial year.

Chief executive Antonio Horta-Osorio said Lloyds, which offered some of the highest dividends in Britain before the crisis of 2007-09, intended to pay out at least half of its sustainable earnings in the medium term.

Lloyds reported an underlying profit of £7.8 billion, up from £6.2 billion the year before and ahead of market expectations for a profit of £7.5 billion.

The bank said its core Tier 1 ratio, a key measure of its financial strength, rose by 250 basis points to 12.8 per cent.

"Today's results are another major milestone in the recovery of the British economy from the great recession and the bank bailouts," said Britain's finance minister George Osborne.

The government will receive a dividend of £130 million. It had already raised nearly £8 billion from the sale of shares in the bank, reducing its stake to below 24 per cent.

Lloyds is further along the road to recovery than its bailed-out rival Royal Bank of Scotland, which yesterday reported a hefty 2014 loss.

Mr Horta-Osorio has turned Lloyds around since becoming its chief executive in 2011, simplifying the business and slimming down to focus on lending to British households and businesses and meet tougher regulatory rules on capital.

But Labour lawmaker John Mann, who sits on parliament's treasury select committee criticised the bank for handing Horta-Osorio a pay package for 2014 worth £11.5 million.

“It’s obscenely high. Why’s he getting so much and the taxpayer so little?” Mr Mann told Reuters.

Lloyds said it paid staff £370 million in bonuses for 2014, down 4 per cent from 2013. Top managers were handed bonuses worth £30 million. – (Reuters )