The surprise PPI provision came after a court judgment two weeks ago against an appeal by banks over the matter and following discussions with the Financial Services Authority, Lloyds said. Lloyds is the most-exposed of the U.K. banks to PPI compensation, which customers are seeking after in some cases having been pressured into buying insurance or not understanding it was optional when they took out mortgages or other loans.
Lloyds's effort to draw a line under the issue could make it less likely that its rivals will seek a new appeal of the FSA's October rules requiring banks to review their past sales of the insurance policies and consider compensation.
By the bank's more-favorable "combined business" reporting that strips out the PPI provision and other costs, Lloyds made a £284 million pretax profit, down sharply from £1.1 million in the first quarter of last year.
Underlying first-quarter revenue slipped, though, to £5.2 billion from £5.9 billion, and was also lower than in the fourth quarter. The bank said the fall reflected lower banking net interest margins, which are being squeezed by its higher funding costs, as well as losses on sales of non-core treasury assets.
The banking net interest margin contracted to 2.07% from 2.12% at the end of the fourth quarter, highlighting the higher cost Lloyds is paying to issue bonds and raise other forms of funding.
Impairment charges rose more than expected because of ongoing weakness in the Irish loan book, hitting £2.6 billion in the quarter, up from £2.4 billion in the first quarter of 2010. Ireland accounted for £1.44 billion of the charge, as the bank anticipates further falls in commercial-property prices from depressed levels. About 56% of its £27.6 billion Irish loan book is now impaired.
The results are the first to be released since new Chief Executive Antonio Horta-Osorio took over March 1, and are being seen as a "kitchen sink"exercise to clear the books and start afresh.
"Lloyds has introduced more detailed quarterly reporting and at face value it appears the new CEO has adopted the kitchen-sink option," analyst Mike
Trippitt at Oriel Securities wrote in a note, keeping a buy rating on the stock.
Analysts at Nomura said the PPI provision, Ireland charges and costs related to asset disposals would likely push consensus estimates down to a pretax loss for the year of roughly £2.5 billion. Analysts had been expecting around £4.2 billion in full-year pretax profit.
Mr. Horta-Osorio told a conference call that it isn't a case of "kitchen-sinking," and that he was only trying to address problems that needed to be solved.
On PPI, he said, "I believe this is the sensible, prudent and right thing to do, to provide certainty for our customers and shareholders, and it is in the best interests of the long-term stability of the business."
Mr. Horta-Osorio is conducting a strategic review of the bank's operations and is due to report to shareholders by the end of June.
Lloyds said central bank funding dropped to £70.4 billion at March 31, from around £84 billion in late February.