Britain’s state-rescued Lloyds Banking Group yesterday reported a first-quarter net loss of £2.4 billion after setting aside a vast sum to compensate clients who were mis-sold payment insurance.
The price of shares in the bank fell sharply.
The loss after tax of £2.4 billion (€2.7 billion) for the three months to March 31 compared with a net profit of £169 million in the first quarter of 2010, LBG said in a results statement.
LBG, 41 per cent owned by the taxpayer, said it was allocating £3.2 billion to cover payouts to customers who were mis-sold payment protection insurance (PPI).
British banks last month lost a high court appeal against moves to tighten regulation of the controversial insurance.
The bank, which also reported a first-quarter pre-tax loss of £3.4 billion, said its losses “principally” reflected the £3.2 billion PPI provisions.
LBG also announced an impairment charge of £2.6 billion, an increase on the first quarter of 2010, as a result of the dire state of Ireland’s economy.
“The charge was approximately £500 million above our initial expectations, which was predominantly due to Ireland where we are now allowing for further potential falls in commercial real estate prices of approximately 10 per cent,” LBG said in its earnings statement.
The bank’s PPI provision was meanwhile far larger than analysts had expected, causing LBG’s shares to open more than five per cent lower.
Stripping out the PPI provision, the lender made a pre-tax profit of £284 million in the first quarter, compared with £1.1 billion a year earlier.
The earnings update is also the first under new chief executive Antonio Horta-Osorio, who began his role in March after stepping down as head of British operations at Spanish banking group Santander.
LBG’s underlying performance shows the lender is slowly recovering after a massive government bailout at the height of the financial crisis. It suffered huge losses in 2008 and 2009, as bad debts rocketed in the wake of LBG’s takeover of British rival HBOS.
It has since shed thousands of jobs as it attempts to turn around its fortunes but the vast sum set aside to cover the PPI compensation is seen as another setback for LBG.
PPI provides insurance for consumers in case they are unable to meet repayments on a credit product and was typically sold with personal loans, mortgages and credit cards.
It became controversial after it was revealed that numerous consumers had been sold PPI without understanding that the cost was being added to their repayments.
Britain’s Competition Commission has since banned simultaneous sales of PPI and credit products. Financial institutions must now wait at least one week to sell PPI following the sale of a credit product.