Lloyds back in the red

The bank, which is 41% owned by the taxpayer, reported a pre-tax loss of £3.47 billion in the first three months of the year, compared to a £721 million profit last year.

The larger-than-expected hit comes after the High Court last month decided new rules on the mis-selling of PPI could be applied retrospectively.

HBOS owner Lloyds is the most exposed UK bank and previously warned the ruling could be “material” for the group.

Elsewhere, the bank saw its bad debt losses increase to £2.6 billion, from £2.4 billion in the same period last year, driven by the impact of the Irish debt crisis.

The PPI provision was much bigger than the City had expected and caused Lloyds shares to open more than 5% lower today.

The results are the first delivered by new chief executive Antonio Horta-Osorio, who took over in March, and will be seen as an opportunity for the new boss to clear the decks at the start of his tenure. He is due to publish a strategy update next month.

Stripping out the PPI provision, the lender made a £284 million pre-tax profit in the first quarter, compared to £1.1 billion the previous year.

Lloyds made the massive PPI provision after the British Bankers’ Association (BBA) lost an appeal against the Financial Services Authority (FSA) over new rules which came into force in December.

The bank said after discussions with the FSA it had accepted there would be certain circumstances where “customer redress” would be appropriate but added there was still uncertainty over the eventual cost.

The results come a month after the Independent Commission on Banking (ICB) interim report, which told Lloyds its planned sale of 600 branches, as agreed with European regulators, did not go far enough.

In today’s results, Lloyds said: “We are surprised that the interim report is proposing a potential expansion of the divestiture of at least 600 branches as mandated by the EU, which we believe is not in the interests of our customers and may significantly delay meeting the commitments agreed between the UK Government and the EU.

“We will continue to play a constructive role in the debate and to consult with the ICB during the coming months ahead of the publication of its final report in September.”

Elsewhere, the results revealed underlying first-quarter income dipped to £5.2 billion from £5.9 billion as higher funding costs hit margins.