Lloyds Banking Group (LSE: LLOY.L - news) shares dropped sharply after the state-backed lender reported a bigger than expected £1.8bn provison for mis-selling claims and worries of a "stock overhang" if the government sells its stake.
Shares in the bank were down as much as 7pc in afternoon trading at 50.7p as investors worried about a possible flood of Lloyds shares coming onto the market diluting the value of the stock.
The state wants to sell its 39pc shareholding, which it acquired from bailing out Lloyds during the 2008 financial crisis, as soon as possible - ideally before the next election in 2015.
Earlier in the day Sky News reported that the Government was planning to sell its shares in the bailed-out bank if the price reaches 61p.
Although the Treasury played down the report, it fuelled expectations that the shares would soon hit 61p - Lloyds said in its results statement that the Treasury had told them that 61p is the average price at which the equity support provided to bank is recorded in the public finances.
"This is a new 'contrived' break-even number for UK Government accounting which conveniently ignores its average in-price of 73.6p. All very interesting, but we hardly see the potential market overhang as positive for upside."
Lloyds reported a £570m pre-tax loss for 2012, down from a £3.54bn loss the previous year.
Stripping out the money set aside for the mis-selling claims, which consisted of £1.5bn for payment protection insurance and £310m for interest rate swaps, the lender said underlying pre-tax profit jumped from £638m to £2.6bn.
While the pre-tax and underlying profits were better than expected, analysts at Canacord Genuity said: "The statutory loss would have been materially worse had it not been for £1.887bn of core asset sale gains that were booked in the fourth quarter of 2012."
Others suggested that there could also be an element of profit taking after a 57pc rise in the shares over the past twelve months as Antonio Horta-Osorio, the chief executive, cut the bank's loan book and costs more quickly than expected and reined in bad debts.
Despite the loss, Britain's biggest retail bank set aside £365m to pay staff bonuses and said it would hand its chief executive, Antonio Horta-Osorio, a deferred share award worth £1.49m.
Mr Horta-Osorio's award will be deferred for five-years and will only pay out if the bank's share price hits the taxpayer's break even price of 73.6p, or if the state is able to sell 33pc of its 39.2pc in the bank for more than 61p.
The board said the conditions support the bank's aim of repaying the taxpayer and Mr Horta-Osório said the bank's "absolute focus" is to get taxpayers' money back and was very confident of doing so.
He said Lloyds was ahead with its revival plan and expected a further big drop in impairments this year and an increase in underlying profit.
The additional mis-selling costs will take the total provisions to cover PPI and the interest rate swap scandal to about £6.8bn.
Net lending to small and medium sized business grew 4pc, against a market that fell 4pc.
Mr Horta-Osório has promised to lend at least £5bn to its one million small business customers this year as part of a pledge to give them "all the support they need".
In an open letter to the group of clients he promised to increase lending, reduce borrowing costs, and help start-ups.
Lloyds is reducing its share of the mortgage market from 28pc to 25pc, but it increasing small business lending.
The chief executive also said a sale of bank branches demanded by the European Commission as a condition for receiving state aid to the Co-op remains the preferred option.