Lloyds makes extra £375m provision for PPI compensation

Paul Kavanagh, chairman of Killik Capital: "Loan demand is on the decline"

Lloyds Banking Group has reported falling profits and set aside an extra £375m to pay for payment protection insurance (PPI) compensation.

Pre-tax profit in the first quarter of 2012 was £288m, compared with a £3.5bn loss in the same period last year.

Lloyds' boss said it "reflected the subdued UK economic environment".

Lloyds, which is 40%-owned by the government, said the extra PPI provisions were down to "the increase in the volume of complaints".

Last week Barclays also increased its provision for PPI compensation, setting aside an extra £300m.

PPI is supposed to cover borrowers' loan repayments if they fall ill, die, or lose their jobs. But it became highly controversial and there have been years of campaigning by consumer groups against the widespread mis-selling of the policies.

Lloyds has now set aside £3.6bn to cover compensation payments.

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No analyst in the world believes that banks can end their addiction to state-supported loans without there being a negative effect on credit provision for households and businesses.”

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Repaying loans

There was also an update on Lloyds' progress in repaying its government-backed loans, which were taken out to keep the bank going during the credit crunch.

It has £12.9bn of Treasury-guaranteed loans left to repay, which is down 45% from the end of the year and compares with a peak of £157.2bn of taxpayer-supported borrowing in December 2009.

The loans came from the Bank of England's Special Liquidity Facility, which was underwritten by the Treasury, and the Credit Guarantee Scheme, which was also guaranteed by the Treasury

But the repaying of loans supported by the Treasury comes at a cost in terms of lending to businesses and individuals, according to BBC business editor Robert Peston.

Lloyds Banking Group

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"No analyst in the world believes that banks can end their addiction to state-supported loans without there being a negative effect on credit provision for households and businesses," he said.

Branch sale

The bank said the profit figure was in line with its expectations and its share price rose 8.3% to close at 33.6 pence.

It said it had been focusing on supporting the housing market and had completed more than £1.3bn of new lending to more than 11,500 first-time buyers in the first three months of the year.

Nonetheless, its loan book was worth £535.6bn, which was down 7% from the same period last year.

Lloyds is currently organising the sale of 632 of its branches, a move which was ordered by EU regulatory authorities and must be completed by November 2013.

Last week, Lloyds ended its exclusive talks with Co-operative Group, although it still refers to the Co-op as its preferred buyer.

In the results statement, Lloyds said it was now considering other offers, but that it was also continuing to work on the option of spinning off the branches as a separate group and selling shares in it on the stock market.

It received a fresh offer for the branches from the banking venture NBNK last month.

"Unfortunately the distraction of the branch sales, an increase in provisions for PPI and the general macro environment are heavy burdens to bear," said Richard Hunter at Hargreaves Lansdown Stockbrokers.

"The likelihood of reaching the government's 70p plus breakeven point [for the share price] seems a long way off, even if Lloyds is making slow and steady progress, whilst the absence of a dividend is another drag on enticing potential buyers."

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