Lloyds bullish, but PPI casts a long shadow

Lloyds Banking Group was hit by a further £1.4bn charge for mis-selling payment protection insurance (PPI) in the first half of this year, taking its total bill for the scandal to more than £13bn.

But the bank, which is now 14.9 per cent owned by the taxpayer, said its underlying business is going so well that in future it will look at paying out excess capital to shareholders through special dividends or share buybacks.

The chief executive Antonio Horta-Osorio said: “We are disappointed to announce a further £1.4bn of provisions today, but we do so from a position of financial and capital strength.”

Lloyds said its underlying profit rose by 15 per cent to £4.4bn in the six months to June. But after the PPI charge and other one-offs – including £660m handed to Spanish bank Sabadell as part of its £1.7bn takeover of former Lloyds subsidiary TSB – pre-tax profits were £1.2bn.

The Treasury has raised £6bn in the past six months, and £13bn in total, from the sale of shares in Lloyds.

There is now a debate over how it disposes of the final 14.9 per cent stake, with the Chancellor, George Osborne, pledging a retail offer. Mr Horta-Osorio said: “I personally think that the current dripping process has been very successful. I understand the political commitment to a retail share offer and we will do whatever is needed.”

The bank declared a 0.75p-a-share interim dividend, costing it £535m, and raised full-year forecasts for improving bad debts and interest rate margins. But the PPI problems have not gone away.

Lloyds’ finance director, George Culmer, said the number of claims and the average compensation paid per customer were higher than expected in the first half.

He expects the rate to start falling significantly over the next 18 months – but if it does not, it could cost the bank a further £3bn over that time.

Lloyds has made provisions of £13.4bn in total for PPI, of which it has used up £12.2bn. Of that, around £2bn has gone on administration and a similar amount to claims management companies, which still account for two-thirds of all claims.

Lloyds now expects to handle a total of 3.9 million complaints, of which 700,000 are yet to be received. It has upheld 78 per cent so far, paying on average £1,935 per policy.

The bank took a £435m hit for other misconduct provisions in the first half, including £117m for a previously announced settlement with the Financial Conduct Authority over its handling of PPI complaints.

Around £175m was set aside over the mis-selling of packaged bank accounts – though Lloyds denied that this area might become “the next PPI scandal”.