British bank Lloyds said it will take a 3.2 billion pound ($5.3 billion) provision to cover it for losses from the mis-selling of protection insurance and suffered another 1.1 billion hit in Ireland.
The part-nationalized bank said it made the provision against payment protection insurance (PPI) complaints after UK banks last month lost a UK court case on how policies were sold to millions of customers.
After discussion with Britain's financial watchdog, Lloyds said there are certain circumstances where customer contact and/or redress will be appropriate, even though there remains uncertainty. It could see rivals also make big provisions.
Lloyds will not be involved with any industry appeal against the ruling and its provision should draw a line under the issue for the bank, CEO Antonio Horta-Osorio said on a conference call.
Lloyds reported a statutory loss of 3.5 billion pounds in the first quarter, compared to a 721 million pound profit a year ago. It said its pretax profit was 284 million pounds before the PPI provision and other one-off items.
Losses from bad loans rose to 2.6 billion pounds in the first quarter, up from 2.4 billion a year ago but down from 3.8 billion in the previous quarter. It said the first quarter hit was 500 million pounds more than it expected, mainly due to Ireland, where losses hit 1.1 billion pounds.
The bank said its net interest margin dipped to 2.07 percent in the fist quarter, from 2.12 percent in the previous quarter due to increased wholesale funding costs.
The British government holds 41 percent of Lloyds and has an 83 percent holding in Royal Bank of Scotland after bailing out both banks with billions of pounds worth of taxpayers' money during the credit crisis.
Due to the bailout Lloyds was ordered by European regulators to sell a string of assets, including 600 branches. A UK commission has said Lloyds may have to sell more than that to improve competition.
It said it was surprised at that proposal, which could delay the sale of branches agreed with the EU.
Lloyds shares fell 1.4 percent to 58.02 pence Wednesday, giving the company a market capitalization of around 40 billion pounds. The stock has fallen by around 10 percent over the last three months.
(Editing by Hans Peters)