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Mis-sold loan insurance costs Lloyds another $1.6-billion

A pedestrian passes the head office of the Lloyds Banking Group in central London in this file photo.

© Stefan Wermuth/REUTERS

Lloyds Banking Group took another £1-billion ($1.6-billion) hit to compensate customers mis-sold loan insurance, taking its charge for the scandal to £5.3-billion and dragging it to a third-quarter loss.

But Britain's biggest retail bank on Thursday provided a more upbeat message on falling losses from loans that turn sour and said its cost-cutting program was ahead of target.

Lloyds has reduced its loan book, cut costs and reined in bad debts as part of a recovery plan devised by Chief Executive Antonio Horta-Osorio to turn around the bank, which was bailed out in 2008 leaving Britain with a 40 per cent stake.

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Like other U.K. banks it has been saddled with multi-billion pound losses to cover wrongly sold insurance on mortgages and other loans, often to people whose circumstances meant they were barred from making claims.

But Lloyds said its bad debts this year were expected to fall to about £6-billion, £1.2-billion less than it had expected at the start of the year. Bad-debt losses in the third quarter fell 35 per cent from a year ago to £1.26-billion.

The bank said it is on track to cut costs to £10-billion this year, down £1-billion from 2010 and two years ahead of target. It said it expects to cut its non-core assets by about 38 billion pounds this year, £13-billion more than it had planned at the start of the year.

"The group continues to perform well in a challenging environment and we are making significant progress against our strategy," Mr. Horta-Osorio told reporters on a conference call.

Lloyds also reported a pretax loss of £144-million for the three months to the end of September, compared with a loss of £607-million a year earlier.

However, its underlying profit rose to £840-million from £419-million a year before. That was ahead of forecasts which ranged from £419-million to £685-million according to a Reuters poll of three banks and brokerages.

Lloyds had already set aside £4.3-billion to repay customers wrongly sold payment protection insurance (PPI), far higher than rivals as it had the biggest share of the PPI market. Analysts had estimated it could set aside as much as £2.3-billion more.

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Lloyds, which blames claims management companies for exacerbating the problem by submitting false claims, said it had paid out or spent £3.7-billion on the issue by the end of September, or 70 per cent of its provision.

Lloyds also made a £150-million provision in relation to German insurance business litigation, taking its charge for the issue to 325 million. It relates to claims in the German courts relating to policies issued by Clerical Medical Investment Group and sold by intermediaries, and follows German court decisions in July.

"While the additional ... provisions are disappointing and there is a risk of still more to come, we believe the company is making excellent progress in improving performance in the underlying business," said analyst Gary Greenwood at brokerage Shore Capital.

Lloyds said it had incurred £731-million in costs this year related to disposals and measures forced on it by European regulators. The forced sale of 632 branches has cost it £611-million.

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