Scandals dent profits at Lloyds as PPI bill rises £600m

Oliver Twist

A £600m provision for mis-sold payment protection insurance and this week's £226m penalty for rigging interest rates has dented profits at Lloyds Banking Group in the first half of the year.

Lloyds' provision for PPI has now reached £10.4bn, pushing the bill for the industry beyond £23bn – the biggest mis-selling scandal in history.

As he reported results for the 24%-taxpayer owned bank, Lloyds chief executive António Horta-Osório apologised for the interest rate manipulation and warned that further "legacy" issues could cost the 24%-taxpayer owned bank another £225m. It may also need to take further provisions for PPI, the bank warned, as it admitted it is handling claims from 40% of the policies sold since 2000.

Horta-Osório said the Libor-rigging episode – which included depriving the Bank of England of fees at the time of its bailout – "as shocking to us as it was to you".

"I would like to say once again this is totally unacceptable and we condemn this without reservation," he said. "I am sorry for the impact these individuals have on our colleagues and shareholders."

The bank is paying £226m in fines and compensation to the Bank of England after it was discovered that its traders had been manipulating interest rates to cut fees it paid for its emergency lifeline at the height of the financial crisis in 2008 and 2009 and rigging Libor. Horta-Osório said the bank's remuneration committee would be looking at the implications for bonuses.

As well as the provisions for PPI and the cost of the Libor, it signalled further fines to come by setting aside another £225m to cover ongoing regulatory issues and £50m for interest rate swaps mis-selling, where it has now provided £580m.

All these "legacy" items knocked pre-tax profit to £863m – a £1.3bn fall on the first half of 2013.

Some of this extra £225m will be used to pay compensation to customers who may have lost out as a result of a bonus policy – including a "grand in the hand" – for which the bank was fined £28m in December.

Horta-Osório said such these issues should not have an impact on the underlying performance, by which measure profits rose 32% to £3.9bn. Bad debt provisions fell 58% to £758m.

The bank, which also owns Halifax and Bank of Scotland, has the largest PPI provision of any lender and and will review 600,000 cases previously paid out in the next six months. Any additional payouts for those claims have already been accounted for. The bank is incurring £200m of costs a month for PPI and of the £10.4bn provision, some £2.1bn is to cover the cost of administrating claims.

While PPI claims are falling – there was a 7% fall between the first and second quarters – they are still coming in faster than the bank expected with another 155,000 complaints received so far this year.

The government has already reduced its stake in the bank from 42% at the time of the bailout in 2008 and has signalled its intention to sell shares to the public. The bank is intending to begin talks with the Prudential Regulation Authority about resuming dividends for the first time since the bailout – which might make the shares more attractive – and publish a new strategy for the bank in the autumn. Payouts, which were blocked by the EU after the bailout, would be at a "modest" level.

The industry is facing an investigation by the Competition and Markets Authority and Lloyds, as the bank with the biggest share of current accounts, said it would be "collaborating" with the markets watchdog.

As the largest mortgage lender in the country, the bank said it expected net mortage lending growth, which includes loans being repaid, would be 1.6% in 2014, up from 0.8% in 2013.

"Outside London and parts of the south east, while house prices have risen, increases have been relatively modest, and many areas remain below their peak levels of 2007. In April, we took further pre- emptive action by limiting our lending for mortgages of over £500,000 to a multiple of four times income," the bank said.

It also issued a warning about the impact of the Scottish vote on independence in September. "In the event of a 'yes' vote, the scale of potential change is currently unclear, but we have been undertaking contingency planning. There will however be a period between the referendum and the implementation of separation should a 'yes' vote be successful that we believe is sufficient to address any material consequences and take any actions that we believe necessary," the bank said.

Powered by Guardian.co.ukThis article was written by Jill Treanor, for theguardian.com on Thursday 31st July 2014 10.20 Europe/London

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