Lloyds Banking Group Headoffice

Bloomberg

Lloyds Banking Group Plc (LLOY), the first of Britain’s four biggest banks to report first-half earnings, posted an unexpected loss after setting aside additional money to compensate clients mis-sold loan insurance.

The net loss narrowed to 641 million pounds ($993 million) from 2.28 billion pounds in the year-earlier period, the London- based lender said in a statement Thursday. Analysts had estimated the bank would report a 314 million-pound profit, according to the median estimate of five surveyed by Bloomberg. Lloyds set aside a further 700 million pounds in the second quarter to compensate customers mis-sold payment protection insurance.

Thursday’s   provision brings the total the bank has earmarked for redress to 4.3 billion pounds, more than the sum set aside by Lloyds’s three largest British competitors. U.K. banks are compensating clients who were forced to buy, or didn't know they had purchased, insurance to cover payments on credit cards and mortgages in case of illness of unemployment.

“This is an industry-wide problem, and other banks are going to follow Lloyds and do something similar,” said Gary Greenwood, an analyst at Shore Capital in Liverpool. “The banks underestimated how aggressive the lawyers were going to be in pursuing PPI claims.”

Lloyds fell 1.7 percent to 28.80 pence  in London trading Thursday. The shares have gained 12 percent this year, making it the best performer in the six-member FTSE 350 Banks Index. The government, which owns about 40 percent of the bank, paid about 73.6 pence a share for its stake.

“I’d like to say categorically the 700 million represents the final word on PPI provision,” Finance Director George Culmer told reporters on a conference call Thursday. “However, it’s made on future claims and, while we’ve conducted as much research into that, we can’t really speak for what the ultimate number might be.”

Chief Executive Officer Antonio Horta-Osorio blamed so- called claims-management companies, which help individuals pursue claims against firms for a fee or percentage of any successful award, for inflating the costs, saying the lender had added an extra 1,000 people to process erroneous claims. More than half of claims received from some firms were linked to insurance policies that didn’t exist, he said on the call.

“Mis-sold PPI policies are an industry legacy issue but by redressing those affected quickly we continue to do the right thing for our customers,” Horta-Osorio, 48, said in the statement. “We are on track to deliver our strategic aims and we are making significant progress with our financial targets.”

Barclays Plc, which analysts expect to post an 11 percent increase in first-half pretax profit tomorrow, has set aside 1.3 billion pounds for PPI. HSBC Holdings Plc, Europe’s largest bank, has made a 770 million-pound provision and Royal Bank of Scotland Group Plc 1.2 billion pounds. The two report next week.

Lloyds said it’s also been named as defendant in U.S. class action lawsuits linked to allegations banks manipulated the London interbank offered rate, the benchmark interest rate for more than $500 trillion of securities from derivatives to student loans. Barclays was last month fined a record 290 million pounds for rigging the rate.

Horta-Osorio declined to give an estimate for the potential cost of Libor lawsuits and regulatory settlements. The lender may be fined 420 million pounds by regulators over its role in the scandal and face a further 38 million pound charge to settle civil lawsuits, Morgan Stanley analyst Betsy Graseck said in a July 12 report to clients.