Lloyds U-turn on £3bn payment protection bill drags it into the red By Jill Treanor

 António Horta-Osório's decision to settle mis-selling claims piles pressure on other banks fighting the FSA in court.

                                                                                                           Photograph: John Stillwell/PA

Lloyds Banking Group had make a pre-tax profit of £1.1bn in the same three months a year ago.

 High street banks were under intense pressure to give up their fight against paying out claims for mis-selling payment protection insurance, after Lloyds Banking Group's surprise £3.2bn provision to cover claims by millions of customers.

 The dramatic capitulation by the new Lloyds chief executive António Horta-Osório caught his rivals – who have been fighting the Financial Services Authority in the courts – on the hop and left the bailed-out bank reporting a pre-tax loss of £3.4bn for the first quarter of 2011.

 Barely three months ago, the former Lloyds boss Eric Daniels unveiled a first full-year profit since the crisis and was awarded a £1.45m bonus for his endeavours. Lloyds said on Thursday that its remuneration committee would consider the payment of any bonuses in light of the PPI provision "in due course".

 Shares in the bank slumped 8% to 53p, leaving the taxpayer nursing a £5.5bn loss on its 41% stake.

 Horta-Osório, who took the helm on 1 March after running the UK arm of Santander, signalled a truce with the City regulator over the seven-year PPI saga, saying: "It is appropriate to take a provision now and move on."

 Horta-Osório, who on his arrival at Lloyds demanded a thorough assessment of the PPI bill, conceded that the £3.2bn provision "feels a significantly bigger number than I would have expected".

 "It is the sensible, prudent and right thing to do," he said of the U-turn. "We believe it draws a line under this issue."

 The British Bankers Association had expected to appeal against a judgment last month which upheld a ruling by the FSA that banks should compensate customers retrospectively for PPI. But Horta-Osório made it clear that Lloyds no longer intended to back any legal action and rivals at Barclays, HSBC and Royal Bank of Scotland – due to report on Friday – were in talks to decide their next step.

 Citizens Advice urged the banks to follow Lloyds and settle claims, as did Adam Phillips, chair of the Consumer Panel.

 Which? executive director Richard Lloyd said: "The rest of the UK's banks must follow suit and draw a line under the great PPI mis-selling scandal by withdrawing their legal challenge of the FSA and proactively reimbursing the millions of customers who were mis-sold PPI."

 He added: "We don't think Lloyds should have kept its shareholders in the dark for so long about its PPI liability. This should serve as a wake-up call to shareholders of other banks that treating customers fairly cannot be ignored. Instead of trying to claw back these losses from its customers, Lloyds should instead look at the bonuses of the senior managers who presided over this systemic mis-selling."

 Other banks are yet to make provisions for the cost of paying claims for PPI mis-selling, which the FSA had estimated could cost £4.5bn. That estimate is now regarded as too low, and while RBS is not expected to reveal the size of any provision when it reports on Friday, many believe it is a matter of time before rivals follow Lloyds and spell out the bills they face. Their shares of PPI sales, according to Deutsche Bank, are 40% for Lloyds, 14% for Barclays, 13% for RBS and 8% for HSBC 8%.

 The BBA said it was "considering whether to make an application to appeal" before the 10 May deadline.

 Horta-Osório, facing accusations that he was "kitchen-sinking" as the bank also upped the charge for bad loans by £500m more than expected, said he was trying to address the problems facing the bank.

 The total group impairment charge reached £2bn for the first quarter after the extra Irish provision. The bank had made a pre-tax profit of £1.1bn in the same three months a year ago and insisted its performance was satisfactory on what it calls a combined business basis, which strips out the costs associated with the integration. On this measure, profits were £284m. But Horta-Osório said: "These are not good numbers and I'm not pleased about them."

 Analysts agreed the first-quarter numbers were gloomy as the cost of replacing taxpayer support in the money markets with £13.5bn of more expensive private money was hitting margins, which fell to 2.07% from 2.12% the previous quarter. First-quarter income had fallen to £5.2bn while losses knocked the crucial tier-one capital ratio to 10% from 10.2%.

 Ian Gordon, banks analyst at Exane BNP Paribas, said: "The underlying picture is poor. It makes any rose-tinted class view appear more tinted. Even if you ignore the one-off items, the worrying thing is the poor level of profitability".

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 The £3.4bn of losses also included integration costs of £333m, which have now topped £3bn since the HBOS deal.

 Lloyds reiterated its warning that the suggestion by the independent banking commission that it should sell more branches should be sold off in addition to 600 branches demanded by the EU in return for almost £20bn of taxpayer aid, could delay the existing sales process.heralded the return to a first full-year profit for the bailed-out bank since the crisis.

 The bank had make a pre-tax profit of £1.1bn in the same three months a year ago and insisted that its performance was "satisfactory" on what it calls a combined business basis, which strips out the costs associated with the integration. On this measure profits were £284m.

 The PPI provision follows the high court judgement on 20 April which upheld a ruling by the Financial Services Authority that banks should compensate customers retrospectively for PPI. Today, sSignalling a new approach to PPI, where banks have stalled on compensation, Horta Osorio said on Thursday: "It is appropropriate to take a provision now and move on."

 The £3.4bn of losses also included integration costs of £333m. The bank reiterated its surprise at the independent banking commission's decision to suggest.

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