British bank Lloyds tumbles back into red

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The grim news, which was worse than market expectations, sent Lloyds shares diving by as much as 10 per cent, and sparked fresh concern about the banking sector's exposure to more bumper mis-selling payouts.

"Lloyds shocked investors by setting aside £3.2 billion to cover compensation claims for mis-selling its debt repayment insurance policies," said City Index analyst Joshua Raymond in response.

"The amount set aside is far graver than the market had expected and also raises fears that other banks embroiled in the insurance issue could also expect to pay out more than was first perceived."

LBG, which is 41-per cent owned by the taxpayer after an enormous bailout at the height of the global financial crisis, also admitted that it made a net loss of £2.4 billion in the three months to the end of March.

That compared with a slender net profit of £169 million in the first quarter of 2010.

British banks last month lost a High Court appeal against tighter regulation of payment protection insurance (PPI), which gives insurance for consumers if they fail to meet repayments on credit products such as personal loans, mortgages or credit cards.

"Following the publication of the High Court's judgment regarding PPI complaints ... the group has concluded that there are certain circumstances where customer contact and/or redress is appropriate," LBG said Thursday.

"Although uncertainties remain, the group has made a provision of £3.2 billion in this regard. This provision has been charged against the group's results for the first quarter of 2011."

LBG also reported a first-quarter pre-tax loss of £3.4 billion, and an impairment charge of £2.6 billion as a result of the dire state of Ireland's economy.

The group's share price later pulled back slightly, but still finished the day with a heavy loss of 8 per cent to stand at 53.38 pence on London's FTSE 100 index, which closed down 1.07 per cent on Thursday.

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.

Thursday's results statement is 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. Lloyds suffered huge losses in 2008 and 2009, as bad debts rocketed in the wake of its takeover of former rival HBOS, which was saddled with toxic or high-risk property investments.

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 became controversial after it was revealed that numerous consumers had been sold the insurance without understanding that the cost was being added to their loan repayments.

Britain's Competition Commission has since banned simultaneous sales of PPI and credit products.