Lloyds Banking (LON:LLOY) set aside an extra £1.4bn for PPI mis-selling as it missed profit expectations in the first half of the year.
Interim profits rose 38% to £1.2bn compared to expectations of £1.9bn, while revenue slipped back 2% compared to the previous quarter at £4.6bn.
Antonio Horta –Osorio, chief executive, also said that the bank would also start to pay back surplus capital through special dividends or share buy-backs.
The news will be music to the ears of the chancellor George Osborne, whose government still holds just under 15% in the company, although he has said it aims to sell its remaining stake over the next 12 months.
Lloyds said the top up was "disappointing", adding: "It mostly reflects higher than expected reactive complaints with higher associated redress."
The amount overall the bank has set aside to pay for PPI now totals a “painful” £13.4bn “rather higher than the market had anticipated” Richard Hunter, at Hargreaves Lansdown said.
There was also an additional £435mln of other conduct provisions, including £175mln for packaged current account mis-selling, which, according to Shore Capital, “appears to be an issue that is gathering momentum.”
Shore Capital said: “While above-the-line performance was good, there was disappointment elsewhere as statutory profits fell short of market expectations.”
The partly taxpayer-owned bank also said it will also pay a dividend of 0.875p per share, costing a total £535mln.
Hunter at Hargreaves Lansdown was optimistic about the results saying: “For the most part, the bank is recovering strongly, and shareholders will have been rewarded by a 13% hike in the share price over the last year, as compared to a 2% dip for the wider FTSE100.”
Shares dropped 1.7% to 84.5p today.