UPDATE 3-Lloyds Bank ready for share sale after return to profit
* 395 mln pounds paid out in staff bonuses
* CEO gets 1.7 million pound bonus
* Union criticises pay awards
* CEO says bank has time to assess Scottish independence
* Shares down 4 percent on fear of stock overhang
By Matt Scuffham and Steve Slater
LONDON, Feb 13 (Reuters) - State-backed Lloyds Banking Group said it was ready to return to private ownership after reporting a pretax profit for the first time in three years.
Lloyds' Chief Executive Antonio Horta-Osorio has turned around the bank's fortunes since taking the helm in March 2011, slimming it down to focus on lending to UK households and businesses and meet tougher regulatory requirements on capital.
But the bank risked a political backlash by paying out 395 million pounds in bonuses last year, up 8 percent on the previous year, including a 1.7 million award to Horta-Osorio. His bonus will be paid in shares and is deferred for five years.
The bosses of Barclays and state-backed Royal Bank of Scotland have both waived their 2013 bonuses. Barclays angered politicians and unions this week by increasing bonuses for its investment bankers by 13 percent.
Lloyds, 33 percent owned by the government, said on Thursday it made a statutory pretax profit of 415 million pounds ($688 million) for 2013, up from a loss of 606 million in 2012, and increased lending in Britain by 3 percent.
Horta-Osorio told reporters that the bank was now ready to return to full private ownership whenever Britain's finance ministry and UK Financial Investments, which manages the government's shares, decide it is right to do so.
"We absolutely consider ourselves back to normal. Its absolutely up to UKFI and the Treasury to decide how and when to dispose of those shares," he said.
Lloyds needed a 20 billion pound bailout in the financial crisis which left taxpayers with a 39 percent stake.
Finance Minister George Osborne wants to sell the shares before the next election in 2015 and UKFI and the Treasury are assessing options for future sales. The government kicked off the process with the sale of a 6 percent stake last September.
Banking and political sources expect a second sale of Lloyds' shares to institutions such as pension funds and insurers in March or April followed by a larger offer including retail investors later in the year.
Shares in Lloyds, which have more than doubled over the past two years, were down 4 percent at 0945 GMT as analysts anticipated a possible stock overhang with the government share sale approaching. Any offer to retail investors would need to be made at a discount to the market price.
"(The) investment case is unaltered. However, (Lloyds) shares may flat-line ahead of any government placing," Numis analyst Mike Trippitt said.
The Unite union on Thursday criticised a 2 percent pay rise for staff at branches and call centres this year at Lloyds, which has cut more than 35,000 jobs since its bailout.
"The CEO's 1.7 million bonus, on top of shares worth millions awarded at the end of October are a kick in the teeth to the taxpayer, and to hard-working staff who don't know if they will be next in line for the chop from one day to the next," Unite national officer Rob Macgregor said.
Lloyds, which owns Bank of Scotland and is registered in Edinburgh, would be affected if Scotland voted for independence in September. Horta-Osorio said the bank would have time to assess its options.
"If the vote is a 'yes', there will be 18 months until separation is implemented so therefore we believe we have more than enough time to assess the consequences or actions we would need to take."
Lloyds and part-nationalised rival Royal Bank of Scotland are drawing up contingency plans in the event of a "yes" vote, Reuters reported last week.
Lloyds said it expected to apply to the regulator in the second half of this year to restart dividends, which would boost the prospect of further stake sales. It last paid a dividend in 2008.
Horta-Osorio said he expects to pay out at least half of Lloyds' earnings in dividends over the medium term.
The bank took 3.5 billion pounds more in provisions last year to compensate customers for past mis-selling. The bank said its core capital - a measure of financial strength - increased to 10.3 percent.
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