The financial giant said pre-tax profits dropped to a worse-than-expected £2.9 billion for the six months to 30 June after the bill for the mis-selling saga and costs such as for restructuring efforts.
The extra provision for payment protection insurance (PPI) was taken in the second quarter as claims surged ahead of the 29 August deadline, bringing its total in the half-year to £650m - and the total for the scandal so far to a mammoth £20.1bn.
On an underlying basis, Lloyds said pre-tax profits slipped 1 per cent to £4.19bn in the six months to the end of June.
Lloyds chief executive Antonio Horta-Osorio said while the economy has remained resilient amid Brexit, the "continuing uncertainty is having an impact and leading to some softening in business confidence as well as in international economic indicators".
The group, which also owns Scottish Widows, said that while longer-term targets remain unchanged, the economic uncertainty "could impact" its outlook.
But Horta-Osorio added: "The group has continued to make strong strategic progress during the first half of 2019 and delivered a good financial performance."
The results showed the bank's retail lending business continued to come under pressure from intense competition in the mortgage market, with its net interest income - a key measure performance for banks - dropping 3 per cent in the first half to £4.4bn. Its open mortgage book fell 1 per cent to £264.9bn, while its closed mortgage book dropped 11 per cent to £19.8bn.
Donald Brown, head of private clients at Brewin Dolphin Edinburgh, said: “Lloyds’ net interest margin, a key measure of profitability, remains stronger than many of its peers at 2.9 per cent – CYBG’s update yesterday was a timely reminder of the robust financial position in which Lloyds currently finds itself.
“Net income and profits may be down, but against the current economic backdrop it’s a resilient set of results for the half-year. Lloyds’ simplicity could prove highly advantageous in the months ahead and its increased dividend will be good news for shareholders; although, some may say a 5 per cent increase is scant compensation for an increased PPI charge, as people react to the impending deadline.
“Brexit remains a challenge for the entire banking industry, particularly domestically-focussed banks, but Lloyds appears well placed to weather the storm.”