Lloyds PPI bill balloons to £5.3BILLION as surge in claims plunges state-backed bank into third quarter loss

By Ed Monk for Thisismoney.co.uk

Updated: 05:35 EDT, 1 November 2012

Lloyds Banking Group has now set aside a staggering £5.3billion to settle PPI mis-selling claims after a £1billion increase in its provision for meeting claims today which also forced the bank to report a third quarter loss.

Lloyds - which includes the Lloyds TSB and Halifax names - upped the sum set aside to pay mis-selling victims by £1billion. It means the 40 per cent state-owned lender was pushed to a £144million loss in the three months to September 30.

From the £5.3billion it has set aside for mis-sold payment protection insurance (PPI), Lloyds had paid out £3.7 billion at the end of September. While the volume of PPI complaints declined quarter-on-quarter, they remained above the level anticipated around the time of its half-year results in July.

Black Horse Down: Lloyds has had to up its provision for paying PPI claims, prompting boss Antonio Horta-Osorio to admit banks had ''lost sight of their core values' in the scandal.

Chief executive Antonio Horta-Osorio said the PPI scandal was allowed to happen as banks 'lost sight of their core values, had become complacent, non-customer focused and inefficient'.

'We could not transform this business without addressing the PPI legacy,' he added.

But Mr Horta-Osorio said the group had made 'significant progress' and remained confident that it can 'rebuild the trust' of its customers.

PPI is the insurance sold by banks and other lenders to covers the costs of repayments on loans, credit cards and other credit agreements if the borrowers is unable to because of unemployment. The cover was widely mis-sold with many policyholders unable to claim, or told they had to accept the expensive insurance in order to access credit.

The banks have been forced to review sales and set aside cash to pay claims. A lack of adequate sales records means that, in many cases, they are having to pay mis-selling claims without contesting them. Some claims are being paid as soon as customers make contact, but many claimants are forced them to complain to the Financial Ombudsman Service (FOS), which settles disputes between individuals and financial companies.

The cash on offer has led to an explosion of claims management companies who offer to process claims in exchange for a fee, typically 20 per cent of the money reclaimed. This is despite the fact that individuals can claim themselves for free.

Lloyds said that 50 per cent of claims from claims management companies are duplicate or fake and has asked the FOS to waive an £850 handling fee for dealing with erroneous claims.

Stripping out the cost of PPI, the group doubled its underlying profit to a better-than-expected £840million in the third quarter as its slashed bad debts and narrowed losses from its non-core businesses.

Portuguese-born Mr Horta-Osorio unveiled a strategic review last year, which included thousands of job losses, as well as plans to sell off large parts of its international operations.

The group said it cut its non-core assets by £30.7billion to £110billion in the first nine months of the year, which is ahead of expectations, while its international presence continues to decline after it announced disposal or exit from 12 countries.

This has hit underlying income which fell 7 per cent in the third quarter to £4.6billion.

Lloyds cut its provision for bad debts to £1.3billion in the third quarter, down 35 per cent from the same period last year, while it also continued to reduce exposure to troubled eurozone countries Portugal, Ireland, Italy, Spain and Greece.

Lloyds did not touch on the Libor-rigging investigation that rocked the industry over the summer despite reports that two of its traders have been suspended in relation to the probe.

Stripping out the cost of PPI, the group doubled its underlying profit to a better-than-expected £840million in the third quarter as its slashed bad debts and narrowed losses from its non-core businesses.

Lloyds Banking Group shares rose 1.01p, or 2.48 per cent, to 41.58p after the results.

Lauren Charnley, from stock broker Redmayne-Bentley, said: 'Lloyds Banking Group will have impressed its investors this morning with its third quarter results, although provisions for mis-sold insurance products continue to weigh on the bank’s bottom line.'