£3bn insurance payout pushes Lloyds into red

THE taxpayer-backed Lloyds Banking Group slumped back into the red yesterday after revealing a shock £3.2bn charge to cover claims for mis-sold payment protection insurance (PPI).

Britain’s biggest lender reported pre-tax losses of £3.47bn in the first three months of the year, compared with £721m profits a year earlier.

The charge to cover millions of mis-sold PPI policies was far greater than the City had expected, and drove shares in Lloyds and its UK banking peers down.

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Lloyds, which was bailed out by the taxpayer after rescuing Halifax Bank of Scotland at the height of the banking crisis, closed down eight per cent at 53.38p.

PPI policies are designed to cover loan repayments if a person loses their job or falls ill. However, they were often sold to self-employed and unemployed people who would not have been able to claim and the High Court ruled last month the banks were at fault.

Lloyds’ results are the first delivered by new chief executive Antonio Horta-Osorio, who took over in March and is keen to clear the decks. He is due to publish a strategy update next month.

“The group has concluded there are certain circumstances where customer contact and/or redress is appropriate,” said the bank.

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“Although uncertainties remain, the group has made a provision of £3.2bn in this regard.”

Lloyds invited customers who think they have been mis-sold PPI to get in touch.

Banks have until May 10 to appeal the court ruling, but Lloyds said it will not, striking a blow to the industry’s defence as it is the biggest PPI provider.

Its decision will put huge pressure on other lenders to follow suit and agree to settle with PPI customers.

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The executive director of consumer group Which?, Richard Lloyd, said: “This is great news for the millions of Lloyds customers who have been mis-sold PPI. It’s refreshing to see a bank break ranks from its peers and do the right thing by its customers.”

The chairman of the Financial Service Consumer Panel, Adam Phillips, added: “The banks have got to change the way they treat customers.

“We reiterate the challenge to the other banks to do the right thing by their customers and accept the judge’s decision.”

The British Bankers Association said it was still considering whether to mount a new challenge against the court’s decision.

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The banking industry was expected to take a £5bn hit from PPI claims, but analysts said the scale of Lloyds’ provision could almost double that.

There are about 12 million outstanding policies, and Lloyds is estimated to have about a third of the market.

After Lloyds the biggest PPI sellers are estimated to be semi-nationalised Royal Bank of Scotland, Barclays, HSBC and Santander.

Yorkshire Bank yesterday revealed it paid out £15m to settle PPI claims between October and March, but added it was too soon to say how the High Court ruling and Lloyds’ decision will affect it.

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Stripping out the PPI provision, Lloyds made £284m pre-tax profits in the first quarter, compared with £1.1bn the previous year.

Losses from soured loans rose to £2.6bn in the first quarter, up from £2.4bn a year ago. The bank said the first quarter hit was £500m more than it expected, mainly due to Ireland, where its impairment charge reached £1.1bn.

The results come a month after the Independent Commission on Banking (ICB) interim report, which told Lloyds its planned sale of 600 branches should be increased.

Smaller lenders including Yorkshire Bank are expected to bid for the branches.

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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.”