Lloyds sets aside extra £1bn for PPI mis-selling

Lloyds Banking Group has set aside a further £1bn to pay compensation for mis-sold payment protection insurance (PPI).

The extra provision was expected after the deadline for PPI claims was extended to June 2019

The announcement came as the bank announced that pre-tax profits for the three months to the end of September fell 15% to £811m.

Total income for the quarter rose by 1% to £4.27bn.

Lloyds is 9% state-owned, but earlier this month the government said it was scrapping plans to sell its remaining shares in the bank to members of the public.

It is now planning to sell its shares via a "trading plan", with small tranches of shares sold to institutional investors.

The extra provision for PPI claims comes on top of the £16bn Lloyds has already set aside to tackle PPI mis-selling. It is the bank worst affected by the PPI mis-selling scandal.

In the third quarter, Lloyds also took a charge of £150m to cover the cost of other "conduct issues" - mostly related to the sale of packaged bank accounts.

Underlying profit - before for the provisions for PPI compensation and the other conduct issues were taken into account - was £1.91bn for the three-month period, down 3% on a year earlier.

Rate cut impact

The bank said its net interest margin - the difference between the interest it gets from borrowers and what it pays savers - was 2.69% for the third quarter, down from 2.74% in the second quarter, "partly reflecting the base rate change in early August".

That was when the Bank of England cut its key interest rate to 0.25% from 0.5% as it attempted to stimulate the UK economy in the aftermath of the Brexit vote.

Low interest rates have a negative impact on banks' performance, because it means they make less from long-term loans.

"The bank's net interest margin continues to be significantly hampered by the low interest rate environment, because it earns less of a turn on each £1 it takes from depositors to lend out to borrowers, but at least that margin is holding steady," said Laith Khalaf, senior analyst at Hargreaves Lansdown.

Lloyds made a £204m provision to cover bad loans in the quarter, up from £157m a year earlier. However, it said the credit quality of its lending portfolio remained "strong".

"One positive offshoot of the low interest environment is that bad loans are still at exceptionally low levels, because debt is so affordable," said Mr Khalaf.

'Disappointing' results

In the nine months to the end of September, pre-tax profits were up by 52% to nearly £3.3bn, while total income was little changed at £13.15bn.

"The third-quarter figures are largely disappointing, whilst the nine months year-to-date performance is rather more impressive," said Richard Hunter, head of research at Wilson King Investment Management.

"There are some concerning developments within the quarter, such as the additional PPI provision, an increase in impairments, the reduction in net interest margin and the overall profit decline.

"Meanwhile, as viewed as a proxy for the UK economy, the shares have been under pressure in anticipation of a hard Brexit, with all its negative connotations and with interest rates remaining at historic lows, the sector in general faces ongoing challenges."

Shares closed down 0.96% at 55.88p.