The banking giant, which also owns Halifax and Scottish Widows, had warned investors it would face a hefty third-quarter charge, but the latest bill is at the top end of the £1.2bn to £1.8bn range they had been told to expect.
The PPI claims ate into the lender’s pre-tax profit, which topped £2.9bn over the first nine months of the year, slightly below the £3.06bn analysts had been anticipating.
Chief executive Antonio Horta-Osorio said: “I am disappointed that our statutory result was significantly impacted by the additional PPI charge in the third quarter, driven by an unprecedented level of PPI information requests received in August.”
An estimated 64 million PPI policies were sold in the UK, many in the 1990s and early 2000s. They were intended to cover missed debt repayments and were frequently marketed to consumers using aggressive tactics.
Many banks have been stung by claims in recent years though Lloyds has been the most exposed. Its latest charge brings its PPI bill to well above £26bn, according to Fiona Cincotta, an analyst at City Index.
Horta-Osorio remained upbeat about the bank’s results, saying it had made “strong strategic progress and delivered solid financial performance in a challenging external environment.
“Although continued economic uncertainty could further impact the outlook, we remain well-placed to support our customers and to continue to help Britain prosper,” he added.
The group said its economic forecast, which is used to calculate some of its predictions, depends on an “orderly” Brexit.
However, it also warned that some things are out of its control, including the risk of other countries following Britain out of the EU, and political instability which could be caused by a general election.
John Moore, senior investment manager at Brewin Dolphin, said: "PPI has reared its head again, this time delivering a £1.8bn charge for Lloyds. Aside from that, the bank’s net interest margin remains healthier than many of its peers, albeit slightly down on earlier in the year.
"Overall, it’s another resilient set of results from Lloyds and its track record on cost-cutting has helped set the bank apart from many of its competitors."
Shore Capital analyst Gary Greenwood noted: “The outlook is cautious reflecting continued macroeconomic uncertainty.
“While a key area of concern, the net interest margin, held up better than expected. Overall we expect forecasts to be coming down and, following a strong run on Brexit optimism, the shares are likely to come under pressure. We still see value in the shares, but expect that we will need to trim our 75p fair value.”
Richard Hunter, head of markets at Interactive Investor, commented: "Lloyds has brought the curtain down on what has largely been a forgettable third-quarter earnings season for the banks.
"Lloyds carries the additional burden of being seen as a pure play on the UK economy, which inevitably keeps a lid on prospects given the further delay to the Brexit conundrum.
"Even without the PPI hit, underlying profits are down nearly 5 per cent in the year to date, while pressure on asset margin remains and the mortgage market, in which Lloyds is a significant player, still suffers from intense competitive pressure.
"More positively, the bank has provided a guarded but cautiously optimistic outlook, with the Schroders tie-up and the acquisition of the Tesco mortgage book likely to bolster income in due course."
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "Another PPI charge wiping out profit will attract the headlines, but it shouldn’t. We already knew an additional charge was coming, even if this is at the higher end of what was expected, and this really should be the last we hear of the whole sorry saga now that the claims deadline has passed.
"There are other details in today’s results that are more important for long term investors. Low interest rates and increased competition mean the bank’s making less money on loans than it has done in the past, and writedowns are creeping up as used car prices fall and some of the bank’s commercial customers run into problems.
"If those trends continue it will be increasingly difficult for Lloyds to grind out growth. Worse, if conditions deteriorate significantly, this quarter’s numbers suggest to us that Lloyds could really struggle."
Shares in Lloyds were down about 2 per cent in early trading.