Lloyds Banking Group said it set aside £750m in 2018 for further payment protection insurance (PPI) claims.
Banks are having to repay customers who did not want, need or understand the loan insurance. The addition takes the bank's total provision pot to £19.4bn.
The bank is making fewer of these additions, it said, helping profits rise 24% to £4.4bn.
The bank paid out £1.86bn to claimants in the year, it said. They have until 29 August to claim.
Lloyds sold 16 million PPI policies since 2000 and has settled or set aside funds for 53% of them, it said.
So far, £31.9bn has been paid out in compensation by UK lenders, with major banks having set aside another £10bn or so for future claims.
Resilient UK economy
"With the claims deadline looming in August, that's going to be a millstone the bank will be glad to leave behind," said Laith Khalaf, a senior analyst at Hargreaves Lansdown. "That means more cash can flow through to shareholders, which is precisely what we're seeing, with an increased dividend and share buyback programme to boot."
As many as 64 million PPI policies were sold from as long ago as the 1970s. The bank set aside £1.65bn for clams in 2017.
"The UK economy has proven itself to be resilient, with record employment," chief executive Antonio Horta-Osorio said in the statement, but warned: "The near-term outlook for the UK economy remains uncertain."
Net interest margin, which is the difference between what a bank pays depositors and charges borrowers and is an indicator of a bank's profitability, rose from 2.86% to 2.93%.
Through dividend payments and buying its own shares back from investors, the bank will pay out £4bn this year, it said.