Lloyds Banking Group revealed the bill for offloading more than 600 branches under the TSB brand is likely to reach £1.3 billion after its deal with The Co-operative collapsed last week.
The taxpayer-backed lender said the costs of the branch spin-off were already near £1 billion and would rise by up to another £300 million as it presses ahead with a flotation for the middle of 2014, if it can gain European Commission approval to extend a year-end deadline.
But shares in the group, which is 39% owned by the Government, jumped 5% higher after it reported a better-than-expected leap in first quarter underlying profits to £1.5 billion from £497 million a year earlier and said lending had returned to growth thanks to stronger business borrowing.
Lloyds profits were boosted as its bad debts plunged by 40% to £1 billion and after it slashed costs by another 6%.
The group said it was ramping up cost-cutting efforts by another £200 million this year under a programme that has already seen more than 8,800 jobs culled - including nearly 1,900 in the first quarter alone. It said the extra savings would be made across the business, but were not expected to lead to further job losses on top of those already planned.
Group chief executive Antonio Horta-Osorio said the group had made "substantial progress" in the first three months of the year, with lending to businesses boosted by the Government and Bank of England's Funding for Lending Scheme (FLS).
Net lending to small businesses grew by 4%, while its overall commercial loan book returned to growth earlier than planned, although Lloyds said net mortgage lending was not expected to start increasing until the third quarter as it continues to shrink its home loan business.
Lloyds also said complaints relating to payment protection insurance (PPI) had dropped by 28% since the end of last year - to around 15,000 a week and were expected to continue falling.
But it is counting the cost of the branch disposal programme - required to meet European rules on state aid - with mooted returns of around £1 billion from a flotation likely to be wiped out by nearly £1.3 billion in costs of separating and listing the business. The sale to the Co-operative - for a reported £750 million - collapsed last Wednesday after the mutual walked away, saying the deal was not in the best interests of its customers.
Mr Horta-Osorio also played down speculation over Government plans to sell its stake in the bank, saying that Lloyds was not currently in discussions with the Treasury. Shares are now close to the 61p average price paid by the Government during the bank's bailout in 2008.