Lloyds suffers multi-billion pound loss and only has itself to blame

THE taxpayer-funded Lloyds Banking Group recorded a huge £3.3 billion loss for the first half of this year as the cost of the payment-protection insurance (PPI) scandal took its toll.

Paying compensation to customers who had been mis-sold PPI was largely to blame for the deficit reported for the six months to 30 June.

The bank, which is 41 per cent-owned by the UK government, said in May it was putting aside 3.2bn to cover PPI mis-selling.

But Lloyds shares still closed down 10 per cent yesterday, as UK banks suffered due to worries over the failing European economy.

Excluding one-off expenses, the bank reported a fall in pre-tax profit to 1bn, from 1.6bn in 2010. The fall in underlying profits was partly down to larger than expected losses on its loans in the Irish Republic and reduced loan income.

Lloyds' 3.2bn PPI compensation bill is the largest of any UK bank. Barclays is setting aside 1bn, Royal Bank of Scotland 850 million and HSBC 269m.

PPI policies have been sold alongside mortgages, loans and credit cards since the 1990s. They were meant to repay people's borrowings if their income fell because they became ill or lost their jobs.

Critics say the banking industry began aggressively selling PPI to customers after realising the policies were highly profitable.

In 2004, it came to light that many banks were returning only 15 per cent of their PPI income to claimants.

Lloyds recently announced 15,000 job losses, taking the total number of job cuts announced since the merger with Halifax Bank of Scotland in 2009 to 43,000.

It also says its European Union-imposed sale of 632 branches is on track.

The UK's biggest lender, which owns Halifax, Bank of Scotland and Cheltenham & Gloucester, is being forced by the EU to sell branches in return for the 20bn in state aid it received following the 2008 credit crisis.

Chief executive Antonio Horta-Osorio refused to confirm the number of organisations that had approached the bank over the sale process, after reports suggested interest had been disappointing.

He said: "We can confirm we have had a number of credible approaches and they have been in line with our expectations."

He added: "We are confident we will find a buyer."Lloyds is understood to be in talks with six interested parties, of which only two - new banking venture NBNK and Co-op Bank - have made formal expressions.

Stripping out the provision set aside for customers mis-sold PPI, the bank saw underlying profits plunge 31 per cent to 1.1bn as it struggled with the "subdued" economic climate.

Mr Horta-Osorio, who announced the 15,000 job losses in his vision for the business in June, said the performance was "resilient" despite the economic challenges and regulatory uncertainty.

However, the bank's share price of less than 40p - a two-year low - is a long way off the 63p at which the government would break even if it was to sell its stake, raising fears that taxpayers may struggle to recover the money.

Lloyds slashed its dependence on emergency funding from central banks and governments - notably the Bank of England and HM Treasury - by 60bn over the six-month period, with the total standing at 37bn.

The bank reduced its bad debt losses by 17 per cent to 5.4bn, as improvements in its wholesale division offset a deterioration overseas, most significantly in Ireland, where the property market continues to fall.

The impairment charge for Ireland increased to 1.8bn in the period, from 1.6bn last year. A further 11 per cent of the 27.6bn loans in Ireland became impaired, resulting in 64 per cent of the portfolio now being impaired.