LONDON – The Lloyds Banking Group said on Monday that it would set aside 1.9 billion pounds, or $3.1 billion, to cover potential claims related to the improper selling of insurance and other products, the latest European bank to increase its reserves for past sins.
Deutsche Bank and the Royal Bank of Scotland have recently announced their own multibillion-dollar charges related to mortgage-backed securities and other legal liabilities.
Lloyds, which is partly owned by the British government, also said that it expected to ask the Prudential Regulation Authority, the financial regulator, for permission to resume paying a dividend “at a modest level” in the second half of 2014. The bank said it aimed to move, over the “medium term, to a dividend payout ratio of at least 50 percent of sustainable earnings.”
The bank said it had begun the process that will allow the British government to sell more of its stake to the public, a priority for George Osborne, the chancellor of the Exchequer. The British government, which provided the Lloyds Banking Group with a £17 billion bailout during the financial crisis, sold a 6 percent stake in the bank in September, and still holds a 33 percent stake.
“Our significant progress in delivering sustainable improvements in our capital position and our profitability, despite legacy issues, is testament to the strength of our business model and the commitment of our people, and has enabled the U.K. government to start to return the bank to full private ownership,” António Horta-Osório, the bank’s chief executive, said in a statement.
Lloyds said that it would take an additional provision of about £1.8 billion to cover additional claims related to payment protection insurance, a contentious insurance product that has cost British banks billions of dollars, and an additional £130 million for interest rate-hedging products sold to small and midsize businesses.
Despite the provisions, Lloyds said it expected to report an annual underlying profit of £6.2 billion for 2013, ahead of analyst expectations of £5.8 billion. The bank is expected to report its full-year results on Feb. 13.
The increased reserve for payment protection insurance reflects, in part, the bank’s revised expectations for a slower decline in complaint volumes than originally forecast. The bank previously took a charge of £750 million for such complaints in the third quarter.
With the additional provision, Lloyds has set aside £9.8 billion to cover potential payment insurance claims. About £2.8 billion had yet to be used as of Dec. 31.
In a research note on Monday, Andrew Coombs and Ronit Ghose, Citigroup banking analysts, said the added compensation for insurance clients should put Lloyds in line with R.B.S. in terms of its usage of the money they have set aside for potential claims, after R.B.S.’s recent profit warning.
“The main focus today is likely to be on the dividend announcement, which we view as disappointing,” Mr. Coombs and Mr. Ghose wrote.
The market was looking for a small dividend in the second half of 2013, they said, “and while the target payout ratio is in line with Citi estimates, it is lower than some had anticipated.”
Including the latest provision, the bank has set aside £530 million in total for interest-rate hedging product claims. About £368 million of the total had yet to be used as of Dec. 31.
An earlier version of this article misidentified a British regulator. It is the Prudential Regulation Authority, not the Prudential Regulatory Authority.