Lloyds first-half profits plunge as cost of PPI compensation tops £10bn

The bank increased its PPI provisions by £600 million as it warned of increased clear-up costs

(Peter Macdiarmid/Getty Images)

Britain’s biggest lender today sought to calm fears that higher interest rates could trigger a mortgage crisis, as its compensation bill for mis-selling payment protection insurance (PPI) smashed through the £10bn barrier.

Lloyds Banking Group increased its PPI provisions by £600m, saying the money was needed to cover a rise in complaints triggered by mail outs, as the costs of clearing up the scandal mount.

Despite reporting better than expected underlying profits of £3.8bn for the first half, up nearly a third, the provision knocked the share price, which finished down 2.81 per cent at 74.26p.

TSB, spun out of Lloyds, announced that it had been buoyed by grabbing 9 per cent of current accounts switches, well ahead of its 6 per cent target, even as profits fell 17 per cent to £78.6m. The bank attributed this to a £62.4m rise in costs ?as it “no longer benefits from the economies of scale of a larger group”.

TSB is struggling with mortgages, because it does not yet have the ability to sell through intermediaries.

Lloyds, however, reported gross lending of £20bn in the first half, £6bn higher than the same period in 2013, with one in four new borrowers dealing with one of the bank’s brands, which also include Halifax and Bank of Scotland.

Its chief executive, Antonio Horta-Osorio, said he expected interest rates to rise but added: “It’s not so important when, it’s more how fast and what will be the new normal. My opinion is rates will rise slower and end up lower than we are used to, with the normal being perhaps 3 per cent.”

While repossessions will rise, so will margins for retail and commercial banks. But the problems created by Lloyds’ forays into investment banking are still weighing on the group. Mr Horta-Osorio kicked off a conference call by once again apologising for the actions of its traders, who conspired to fix interest rates with the aim of cutting fees due to the Bank of England for participating in its Special Liquidity Scheme of short term loans during the financial crisis.

“I would like to say once again, the actions of these individuals were unacceptable and we condemn them without reservation. I am sorry for the impact these individuals have had on our shareholders, colleagues and reputation.”

The interest rate fixing – which lead to £226m in fines and compensation – prompted the Bank’s Governor, Mark Carney, to fire off a furious missive to Lloyds’ chairman, Lord Blackwell.

However, Lloyds said it did not believe it would affect the Bank’s decision on whether it can pay a dividend again.

The cost of the scandals meant that statutory pre-tax profits slumped to £863m, down £1.1bn on a year ago.