Britain's state-rescued Lloyds Banking Group posted mixed earnings on Wednesday as the lender set aside more cash to compensate customers who were mis-sold insurance.

Net profit, or earnings after taxation, was flat at £690 million (957 million euros, $1.06 billion) in the three months to September, compared with the same period a year earlier, LBG said in a statement.

However, underlying pre-tax profits before exceptional items and legacy costs fell eight percent to £2.0 billion in the reporting period.

That dashed market expectations for about £2.3 billion.

The group took another £500-million payment protection insurance (PPI) charge in the period, taking its total bill for the mis-selling scandal above £13.9 billion.

Chief executive Antonio Horta-Osorio said the bank continued to make "strong financial progress".

In early morning deals however, Lloyds shares sank 4.70 percent to 73.76 pence on London's FTSE 100 index, which rose 0.27 percent in value.

"Lloyds bank has delivered mixed results this morning, with the headline profit figures and continued provision for PPI redress coming in slightly worse than expected," said Rebecca O'Keeffe, head of investment at stockbroker Interactive Investor.

"The miss on underlying profits has dampened expectations of a steady increase in future dividends and this has seen the share price fall."

The British government bailed out Lloyds during the financial crisis in 2008 at a cost of some £20 billion, taking out an initial stake of 43 percent.

It has been gradually reducing its stake in the lender in recent months, returning about £15.5 billion to the taxpayer. The stake currently stands at less than 11 percent.

Earlier this month, the government announced it would sell another £2.0 billion of shares to the public in spring 2016 -- and will exit its holding in the coming months.