Lloyds sets aside £1.5bn compensation

Lloyds, Britain’s biggest retail bank, has set aside another £1.5bn (€1.7bn) to compensate customers mis-sold loan insurance, hitting its shares and tempering prospects for a swift sale of the government’s stake.

The British state wants to sell its 39% shareholding, which it acquired from bailing out Lloyds during the 2008 financial crisis, as soon as possible — ideally before the next election in 2015.

Shares in Lloyds have had a strong run, up by 44% in the last 12 months, as chief executive Antonio Horta-Osorio impressed investors by cutting the bank’s loan book and costs more quickly than expected and reining in bad debts.

That had fuelled expectations the shares would soon hit 61p — the level which the government regards as its break-even price that could trigger a partial sale after deducting fees it has already received from the bank. The shares closed on Thursday at 54p.

Yesterday, though, they fell 7% to just over 50p after the higher compensation bill overshadowed Lloyds’ full-year results.

Horta-Osorio said he was “very confident” that taxpayers would get their money back — so much so that he has asked for his annual bonus of £1.5m to be paid back only when the shares are trading above the 73.6p the government bought in at or the government sells at least a third of its holding for more than 61p.

His bonus will be paid in shares and deferred until 2018.

Lloyds now expects to pay out £6.8bn to customers wrongly sold payment protection insurance, more than any other bank.

The policies were meant to protect customers in the event of sickness or redundancy, but were often sold to borrowers who did not want or need them.

Over £14bn has now been set aside by UK banks to deal with the issue and industry sources have said the final bill could hit £25bn.

Lloyds made an underlying pretax profit of £2.6bn in 2012, up from £638m a year earlier.

Lloyds is also one of more than a dozen banks still being investigated by regulators for their role in a global rate-rigging scandal. But finance director George Culmer said it was not one of the banks at the centre of the probe.

“This isn’t something we’re just passive about,” he said. “We do make proactive enquiries. It’s not something that we get a lot of heat on.”

Lloyds set aside £400m to compensate small businesses mis-sold complicated interest-rate hedging products. The provisions dragged the bank to a pre-tax loss of £570m for the year, compared with a £3.5bn loss in 2011.

Horta-Osorio said Lloyds’ plan to sell 632 branches to the Co-Op remained “on plan” despite reports that it was on the verge of collapse.

— Reuters