National Australia Bank has already set aside £811.5m to provide redress to customers and said yesterday that “significant additional provisions” are likely at the end of the year.
This raises the prospect of the clean-up bill reaching £1bn.
NAB increased provisions by £245m in the third quarter to make good the mis-selling of payment protection insurance and tailored business loans.
The figures overshadowed “good progress” made by Yorkshire and Clydesdale which reported strong growth in residential mortgage lending and deposit balances and a fall in charges for bad and doubtful debts.
David Thorburn, chief executive of the UK operations, said in a statement: “There are many positives to see across the bank, however in line with the industry, we continue to deal with legacy issues.
“The way we’ve handled historic PPI complaints has not been consistent and we are committed to putting this right.
“We have already introduced a new PPI complaint handling process, and we will also apply this process to a systematic and proactive review of all past PPI complaints.
“I am confident that the changes we have made, and continue to make, are taking us toward our goal of building a strong, customer focused for the communities we serve.”
Mr Thorburn is the former deputy to Lynne Peacock, who was chief executive of NAB’s UK operations from 2003-2011.
The new provisions include £75m to cover the increased costs of administering the PPI remediation programme.
NAB expects the new complaints handling process will lead to increased payments for new complaints and in revisiting closed complaints, including some dating back to before 2000.
The Financial Conduct Authority has launched an enforcement process against Clydesdale and Yorkshire banks in relation to its previous PPI complaints handling process.
NAB said: “The ability to reliably estimate the impact of these developments remains uncertain.”
The provisions also include £170m to cover the cost of mis-selling interest rate hedging products to small and medium-sized businesses.
These were sold to protect against a rise in the cost of borrowing money during the boom years but left many holders dangerously exposed when interest rates fell to record lows.
Andrew Thorburn, the new chief executive of NAB, said his UK operations face a number of challenges.
He said: “Like all large businesses there are things we can do better at NAB and we will have more to say on this at our full-year result on October 30.”
A spokeswoman for the Financial Conduct Authority said the City watchdog would not comment directly on the NAB announcement.
But she added: “We expect all firms to comply with our rules and treat their customers fairly.
“Firms know that PPI complaints must be thoroughly investigated and that appropriate action, where required, is taken promptly.
“We continue to work closely with the larger firms concerning their handling of PPI complaints to ensure PPI complaints get fair outcomes.”
It is estimated that UK banks have set aside £24bn to cover the cost of mis-selling PPI.
Economists have said that the compensation has provided a boost to the UK economy.
Earlier this month, NAB appointed City financier Jim Pettigrew to chair the boards of Clydesdale Bank plc and National Australia Group Europe to help build “a stronger and more competitive business”.
Last month, NAB announced the sale of a £625m parcel of troublesome UK commercial property loans to Cerberus Global Investors, a US fund is said to be named after the three-headed hellhound of Greek mythology.
Bad news keeps coming, says analyst
The bad news just keeps coming for Yorkshire and Clydesdale banks, according to Morningstar analyst David Ellis.
He claimed that National Australia Bank is “more keen than ever to exit the UK”.
Cameron Clyne, the previous chief executive, tried and failed to sell the UK operations in 2011.
NAB managed to offload a portfolio of UK commercial real estate loans totalling £625m to a US investor last month.
Andrew Thorburn, the new CEO, said yesterday: “This was a pleasing result, and as we have previously said we will continue to look at opportunities to optimise return on equity by accelerating the sale of non-core assets.”