Lloyds hit by mis-selling charge, weaker third quarter

Sets aside 500 million pounds to compensate customers mis-sold loan insurance

Lloyds Banking Group, Europe's second biggest bank by market value, reported weaker than expected third-quarter results on Wednesday and set aside another 500 million pounds ($765 million) to compensate customers mis-sold loan insurance.

Underlying pretax profits fell to 2 billion pounds, down from 2.2 billion in the same period last year. Analysts polled by Reuters had expected the result would be unchanged from last year.

Total income declined by 4% to 4.2 billion pounds, also below forecasts, as the bank said the performance of its commercial banking division was hit by tougher trading conditions and income was lower in its insurance business.

"The results themselves are poor, while there is also limited commentary on the dividend outlook," said Citi analyst Andrew Coombs.

Shares in the bank were down by 4.7% at 73.8 pence by 0905 GMT, a setback for Britain's finance ministry which is planning to sell 2 billion pounds worth of shares in Lloyds to private retail investors next spring to return the bank to full private ownership.

Lloyds was rescued with a 20.5 billion-pound taxpayer-funded bailout during the 2007-09 financial crisis, leaving the government holding a 43% stake. It has since reduced its holding to under 11%, raising over 15 billion pounds.

The new mis-selling charge brought Lloyds' total bill for compensating customers mis-sold payment protection insurance (PPI) to 13.9 billion pounds, more than double that of any other bank. The policies, designed to protect borrowers in the event of sickness or unemployment, were found to have often been sold to people who would have been ineligible to claim.

Over the last five years banks have already set aside more than 28 billion pounds ($42 billion) to meet compensation claims. Britain's financial regulator said in October that it intended to set a 2018 deadline for people to claim compensation for the mis-selling, a decision that was seen as positive for Lloyds, but the bank's Finance Director George Culmer said on Wednesday the deadline should be brought forward.

"We think two years is excessive. We think that a shorter time bar will actually get people to act more quickly and get receipt of their money more quickly. In terms of general awareness, two years is not required," Culmer said.

As well as the PPI charge, Lloyds set aside another 100 million pounds on Wednesday to cover potential claims relating to other products sold by staff in its branches.

The bank's core Tier 1 capital adequacy ratio increased to 13.7% of risk-adjusted assets, compared with 13.3% at the end of the second quarter. Lloyds has said it will look to return surplus capital of above 13% to shareholders.

($1 = 0.6532 pounds)