Lloyds pays customers £150m for endowment mis-selling

Mis-selling of endowment mortgages has cost Lloyds TSB £150m this year, on top of £360m already paid out in recent years for compensation claims over a variety of financial products.

The bank is still reviewing the total cost of compensating its customers but admitted yesterday this could lead to an increased provision in the accounts, primarily for past sales of endowment mortgages. In a trading update before its 2005 full-year figures, due on February 24 next year, Lloyds also revealed it would need to set aside another £150m to cover the cost on insurance policies of people living longer.

"The combined impact of these two items, which will be evenly split, is expected to be a charge of circa £300m," Lloyds said. The bank said it was still on track to meet the market's expectations of £3.3bn pre-tax profit for 2005, broadly flat on 2004.

Lloyds TSB is not the only bank to be facing claims for misselling of endowment policies designed to pay off home loans. Rival HBOS, the country's biggest mortgage lender, has admitted to setting aside a total of £260m in the last two years while the Financial Services Compensation Scheme has been inundated with claims.

The group, which also includes mortgage lender Cheltenham & Gloucester and insurer Scottish Widows, disappointed the City by warning that customers were continuing to have difficulty repaying their debts. Other banks, such as Royal Bank of Scotland, had indicated this was beginning to improve slightly. Lloyds TSB, the last of the major banks to update the City, said that against the backdrop of slower growth in consumer lending "the retail bank has experienced lower levels of growth in unsecured consumer lending, together with some further deterioration in credit quality as more consumers, with higher levels of indebtedness, have experienced repayment difficulties".

The bank made no mention of payment protection insurance policies, the controversial loan insurance it sells, which is under investigation by the Office of Fair Trading.

Lloyds TSB, which has faced calls to sell off its Scottish Widows insurance arm, said the insurance business had £800m of excess capital which would be repatriated to the overall group by the end of the year. "This is in addition to the £200m dividend paid by the group in March 2005, which reflected the start of an expected regular annual dividend stream," the bank said.

Eric Daniels, the chief executive, said: "We are continuing to make good growth progress against our objective to deliver sustained earnings growth, particularly against the backdrop of the slower consumer environment in the UK."

However, analysts at Dresdner Kleinwort Wasserstein described Lloyds as "strategically challenged". Speculation about a possible takeover had been helping to buoy Lloyds shares, which closed yesterday down 1.25p at 481.5p.