City shocked as PPI scandal hits Lloyds for £3.2 billion

Taxpayer-supported Lloyds Banking Group plunged back into the red today as it set aside a staggering £3.2 billion to pay compensation to millions of its customers who have been mis-sold payment protection insurance.

The decision by new chief executive António Horta-Osório took the stock market and the banking industry by surprise.

Lloyds' shares slumped 5p to 53p, sending them more than 10p below the average 63.2p that the Government paid for its 41% stake.

This leaves the taxpayer nursing a loss of almost £3 billion.

Last month the Financial Services Authority won a long legal action against the banks, which trade body the British Bankers' Association reckoned could cost them £4.5 billion. The BBA has until next week to appeal.

But Lloyds' decision to pay out compensation to its customers puts huge pressure on the other banks to capitulate and also suggests the final bill could be much larger. Some industry sources say it could hit £9 billion.

Horta-Osório, who replaced Eric Daniels at the start of last month, said: "This is the sensible, prudent and right thing to do, certainly for our customers and our shareholders. We will take a provision now, draw a line under it and move on. I don't want us to have a long-running dispute with our regulator."

He said Lloyds would no longer be part of any further legal action taken by the BBA.

Lloyds declined to say how many customers it expected to claim compensation for mis-selling.

But industry sources said it would probably run into millions with the bank, particularly its TSB brand and the Halifax and Bank of Scotland brands which came with its ill-fated takeover of HBOS, by far the biggest seller of PPI in the industry.

Royal Bank of Scotland, the third-largest seller of PPI (after Lloyds and Barclays), reports its first-quarter figures tomorrow. It declined to comment today but there is growing speculation it may also decide to take the hit with a figure of about £2.2 billion being suggested by analysts.

Lloyds reported a first-quarter pre-tax loss of £3.47 billion against a modest profit of £721 million in the first quarter of 2010.

The bad debt charge for the first three months of the year rose from £2.4 billion to £2.6 billion with an extra £500 million of provisions against bad commercial and property loans in Ireland. Most other banks have reported sharply lower bad loan
writedowns as the economy starts to pick up slightly. Horta-Osório refused to comment when asked if, in the light of the poor first-quarter results, Daniels should give up his £1.45 million departing bonus.

He also declined to say more about Lloyds' anger over the Independent Commission on Banking's interim suggestion it should be made to sell more than 600 branches.