Lloyds TSB sets aside £300m provisions

Lloyds TSB has revealed that it has set aside more than expected to cover compensation claims for mis-sold mortgages and pension payouts to an ageing population.

The bank, the country's fifth-biggest, increased provisions for each by £150m. Bad debts are on the up at Lloyds too, as steeper mortgage payments and utility bills leave more Britons unable to meet repayments.

Its retail bank has seen slower growth of spending on credit cards and in customers taking out unsecured loans. Lloyds makes more unsecured personal loans than any other bank.

Thousands of endowment policy holders across the UK have faced a shortfall in recent years after stock markets fell between 2000 and 2003, making it hard for them to repay mortgages. Those companies that sold these policies stand accused of not warning of potential pitfalls and many have been ordered to compensate policyholders.

James Hamilton, a banking analyst at WestLB, said: "Lloyds has consistently promised the market that their mis-selling provisions for various savings and investment products they've sold are a one-off, and there is another provision here for customer redress. This is a serious problem for the bank and I don't think it is ever going to end."

Experts at Dresdner Kleinwort Wasserstein, the German investment bank, also warned last week that Lloyds stands to lose the most from any clampdown on sales of payment protection insurance. DKW estimated that Lloyds sold £660m in PPI last year, accounting for huge pre-tax profits of £450m - 14 per cent of total group profits in 2004. It is the key driver of revenue growth in Lloyds' UK banking division, DKW said.

The Office of Fair Trading is to launch a formal inquiry into the PPI market after a super-complaint from Citizens' Advice three months ago.

Despite the gloom, Lloyds has reassured investors that it still expects to meet City targets for pre-tax profits of £3.3bn this year.

Business banking and Lloyds' corporate markets operations are still doing nicely on the back of cross-selling. They contributed to a 9 per cent increase in net income to £1.19bn in the first half of Lloyds' year.

Revenues will outpace costs across all divisions of the bank this year. Lloyds' net interest margin - the difference between the cost of borrowing and lending, and a measure of profitability - is steady.

Eric Daniels, Lloyds' American chief executive, is trying to grow revenues after previous management relied on cost-cutting throughout the 1990s.

He said in a statement: "We are continuing to make good progress against our objective to deliver sustained earnings growth against the backdrop of the slower consumer environment in the UK."

Scottish Widows, its life and pensions business, will contribute £800m in surplus cash to the group by the end of the year. That's in addition to the £200m dividend Widows paid Lloyds in March.

The bank gave no update on future plans for Scottish Widows Investment Partnership, its Edinburgh-based fund management business.

The Independent revealed last month that SWIP was in talks with Belgian-Dutch bank Fortis about a possible merger of their asset management arms. SWIP is understood to want to the dominant partner in any tie-up.

Despite concerns over Lloyds' room for growth, the shares have been supported this year by its dividend yield of around 7 per cent - one of the biggest for any European bank - and persistent bid rumours.

American and Spanish banks, including Wells Fargo and BBVA, are seen as potential bidders.

DKW estimated that Lloyds sold £660m in PPI last year, accounting for huge pre-tax profits of £450m - 14 per cent of total group profits in 2004. It is the key driver of revenue growth in Lloyds' UK banking division, DKW said.